The forecasting approach employed here continues to give a positive signal for global economic growth in the first half of 2013 but equities and other risk assets may already have largely discounted this outlook.

The approach relies on three key indicators of the global economic cycle:

• Global real narrow money growth, which leads industrial output expansion by an average of six months (based on a comparison of turning points in recent cycles).

• A composite leading indicator derived from the OECD’s country leading indices, with an average three-month lead.

• A “leading indicator of the leading indicator”, designed to give earlier warning of turning points, with an average five-month lead.

As discussed in previous posts, all three indicators have picked up since spring 2012 and are currently at a level historically consistent with solid global economic expansion.

Market performance, however, appears to be related to the direction of change of the indicators rather than their level. All three were moving lower before the 13% correction in world equities in spring 2012 (as measured by the MSCI World index in US dollars). The “double-lead” indicator turned up in May last year, followed by real money growth in June and the leading indicator itself in July. This warranted optimism about equity market prospects, particularly given depressed investor sentiment at the time.

Directionally, global real narrow money growth and the leading indicator are still giving a positive signal but the double-lead measure is flashing amber, declining in the latest two months – see Monday’s post for details. This ambiguity may warrant more conservative portfolio positioning, particularly with investors now relatively bullish – the Credit Suisse risk appetite measure is well above average while fund managers are holding the least cash since April 2011, according to Merrill Lynch.

Global six-month real money expansion appears to have risen further in December, based on data for 60% of the components – see chart. The recent divergence with the double-lead indicator is unlikely to persist; it will be resolved either by real money growth turning down or the indicator rebounding. This will determine whether the next shift in market view here will be towards greater caution or renewed optimism.