Worried about that US labour data? Concerned that a recovery in the real economy has yet to emerge?
Do not panic! And whatever you do, do not sell your equities!
At least, that’s according to analysts at Credit Suisse, led by Andrew Garthwaite.
Having directed investors to buy stocks and sell bonds last month, they are now advising them to hold on to those equities for dear life. In fact, the investment bank is ignoring the tactical indicators that would normally lead it to strategically downgrade global equities. Here’s the Credit Suisse thesis:
Tactical indicators at current levels would normally lead us to downgrade equities, but their signals are less meaningful at this stage in the cycle. A further near-term correction is possible, but we believe that the S&P 500 will be 1,100 by year-end.
What “tactical indicators” might those be exactly? Just these:
■ Equity sector risk appetite is 1.6 standard deviations above normal levels. However, when it last hit this level in October 2003, equities rose another 8% over the subsequent three months. Typically, risk appetite peaks 1½ months after the peak in IP (implying November/December);
■ Net corporate issuance is close to 0.5% of market cap, but we would not be concerned unless it rises above 1%;
■ Insider buying and share buy-backs are very low, but this was the same in 2003/04;
■ There has been a loss of market breadth, but still less extreme than between 1998 and 2000.
Further tactical concerns: a) positive pre-announcements were extremely low in September, but Q3 EPS consensus expectations still look too low (below Q2); b) the Fed may enact reverse repos, but excess reserves have started rising again and are likely to increase by another $600bn. We note that 40% of QE announced globally has yet to be implemented.
Hooray! Crisis averted yet again:
Strategically, we remain overweight equities—and think we could see 1,100 by year-end: a) lead indicators suggest US GDP growth of 6.4% on a quarterly annualised basis and we are convinced that core inflation will remain benign; b) earnings outlook is still positive: we expect 29% EPS growth in 2010E (US$76 EPS is our new target, up from US$71); c) investors are still sceptically positioned; d) most major credit and economic variables are better than pre- Lehman levels, when the market was at 1,252; e) the ERP is 5.4% on consensus numbers—some 16% cheap relative to our target of 4.5%.
Given that the bank seems to be ignoring its own (negative) technical indicators, it’s worth asking what would actually make them downgrade global equities? Here’s what they say:
What would lead us to downgrade tactically? Risk appetite rising to 2 standard deviations, net issuance rising above 1% of market cap, economic & earnings momentum peaking.
What would lead us to downgrade equities strategically? Two-year note yields rising significantly (we expect 2H 10 at the earliest); bank lending growth return aggressively, potentially causing a funding crisis; China’s wage growth accelerating or US house prices falling more than 10%.
Watch this space.
Related links:
European equities trump high-quality credit, MOST says - FT Alphaville
Sell bonds, buy stocks, Credit Suisse says – FT Alphaville