The main driver of global markets is the US. As the largest economy by some way, what happens in the US and the global reach of its companies, affects the rest of the world. That does not mean, however, that the US market is an area where UK investors must have exposure. Indeed, over the past few years, other markets have outperformed.

Wall Street's performance has not been stellar these past few years, but its progress has been decent enough to provide a platform of support for other equity markets. Lest one think that the resource stocks have been leading equity markets up, note that, at least for the major markets, those with low weightings in resource stocks, such as the eurozone and Japan, have been doing better than those with comparatively higher weightings, such as the US and the UK.

That the US market has risen at all during the Federal Reserve's quest to restore US interest rates to a neutral setting is impressive. After all, rising interest rates are a negative influence on fair values.

Since the Baghdad Bounce, earnings for the S&P 500 Index constituent companies have risen by 64 per cent, but the index itself has only risen by 53 per cent. That represents a sizeable de-rating for the equity market, but all of it has taken place since interest rates were increased from one per cent two years ago.

That means that although the US market has risen over the past two years, it is now cheaper than before. Investors are now paying less for each dollar's worth of US earnings per share than they were a year or two ago, and this contrasts with the position for other major equity markets, where investors are paying at least as much for earnings per share, if not more.

This relative decline represents a considerable improvement in Wall Street's valuation and makes it a better buy today relative to other world equity markets than at any time in the past three years.

The conviction has grown that the Federal Reserve is inclining towards calling time out on its lengthy and steadfast drive to policy neutrality. We expect it will do this after the next Federal Open Market Committee meeting tomorrow, when the fund's rate is raised to five per cent.

We believe that once the interest rate shackle is removed, there will be little reason for the de-rating on Wall Street to continue. The US market could be set for a modest re-rating.

Imagine the difference that would make to the performance of Wall Street, especially if earnings continue to grow as they have. The first quarter reporting season is under way. The ratio of positive to negative surprises is a whopping 7.5 to one, ie for every company that has missed its forecast, seven-and-a-half companies have beaten theirs. This ratio is much higher than it was at corresponding stages in each of the quarterly reporting rounds last year.

The interest rate situation in the UK is somewhat different. Last week, the Bank of England's monetary policy committee left interest rates unchanged at 4.5 per cent, where they have been since August last year. The committee's lonesome dove, Stephen Nickell, has now left, and with him go the prospects of a cut in interest rates.

- For investment advice contact Anthony Platts on 01642 608855.

Published: 09/05/2006