Wednesday Aug 20 2008
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The recent market wobble has simply enhanced the attractiveness of leading US equities, Goldman Sachs strategist Abby Cohen declared on Wednesday. And anyone who tries to draw parallels between the current process of de-risking and the ugly events of October 1987 should look at the facts.

The ‘87 crash was caused by portfolio insurance, which was found to be structurally faulty. It sought to minimise investors’ losses by automatically reallocating assets when markets fell, but because prices gapped the system failed — resulting in computer-driven orders to sell equities at ever-lower prices.

The current episode of market volatility is still underway and it is too early to carry out a full review of precisely what happened, Cohen says, but she does think its is a good moment to review the likely fundamental backdrop and therefore the attractiveness of equities.

Cohen’s conclusions:

• No changes to Goldman’s baseline forecasts. “These already reflect a notable deceleration in economic and profit growth in 2007, but there is no recession on the horizon.”
• Valuation support is intact for US equities.  “Our estimated fair value for year-end 2007 remains 1550, suggesting that the S&P 500 is now about 11% under priced…The strength of US corporate balance sheets, especially among the companies in the S&P 500, and strong ROEs, should also offer some ballast in a rocky market environment. We assume that margins will move lower in many
  industries this year, but from record-high levels to still-high levels.”
• GS forecast has long presumed a deceleration in economic growth this year. “Importantly, core inflation is not expected to rise dramatically.”

So it’s official then. Whatever Alan Greenspan thinks, the panic’s over. For now.