Ian Harwood, strategist at Evolution Securities, is in bullish mood on Monday and he is not the only one…
(Emphasis ours):
As far as being optimistic or pessimistic about the global economy is concerned, now is the time to stand up and be counted.
The title page of presentation pack I take round to clients is entitled: “Sustained recovery or double-dip?” My answer is the former.
Indeed, last week I published a research note which focused on the fact that the overwhelming majority of recent real economy news world-wide – and not just in the US – had been stronger than expected. Subsequent data out of Asia was exactly the same.
Despite this, markets world-wide spent last week in a state of funk, worrying what awful news lay around the corner. Indeed, the Daily Telegraph even ran a story last week claiming that many in the City were worrying about a Great Depression Mark 2!
And he is not the only strategist who is refusing to go without a fight.
The Global Strategy Team at Nomura also think investors are fretting too much about what could wrong and igonoring what could go right.
The markets’ drop of about 12% from the peak in mid-April implies a double-dip. However, the divergence between “fundamentals” and stock prices is among the widest in history.
- The number of earnings upgrades in May is amongst the highest we have seen.
- The combination of improved earnings and lower prices has resulted in a large de-rating for the market.
- The decline in the forward PE this month has been eclipsed only by the Russian default and the Lehman bankruptcy, credit yields have remained stable.
- This means that the risk premium now on offer in equities relative to corporate bonds is 3.7%, comfortably the highest level in at least the past 22 years.
- Unless earnings estimates start falling soon or credit yields rise sharply, equities offer outstanding value relative to other assets.
Meanwhile, JP Morgan has chose to focus on the dividend/bond yield cross over as a reason to buy.
The trailing reported dividend yield on FTSE100 is today 3.8%, compared to 10 year Gilt yield at 3.5%. In March ’03, when DY moved just above 10Y Gilt yield, that was seen as a very strong support for equities. Today this spread is 30bp. For Eurozone, the trailing dividend yield is today at 3.8%, compared to German bond yields at 2.6%, a pickup of 120bp. European forward P/E today is 9.7x, vs historical average of 13x. In March ‘09, it was at 8.1x P/E. EMU EPS integer has continued to advance, moving up by 9% ytd.
And BofA Merrill Lynch is telling clients to “buy” tech and feel better.
Corrections seem to feel like the end of the world, leaving many with a sinking feeling that can precipitate rash decisions. Times like this make it clear that the equity risk premium is no free lunch and volatility is gut wrenching even for the most long-term of investors. We believe the best way to feel better during a correction is to buy some shares. We recommend using the correction to buy the S&P 500 broadly with a preference for mega-cap stocks, especially big-cap Tech stocks. In our view, Tech is on sale because investors are over estimating the negative impact from a stronger dollar. While Tech faces FX headwinds, we expect the rebound in corporate IT spending to drive EPS growth in 2Q10 and through 2011. Tech conglomerates are gaining market share and new initiatives like cloud computing are allowing these companies to capture more of corporate IT budgets.
However, at pixel time investors appear to be shunning this advice. The FTSE 100 has given up its early gains and is currently trading flat.
However, Harwood remains undeterred:
On the “what could go wrong score”, the major central banks – notably the Fed – aren’t about to hike rates in the face of a non-existent inflation threat; the Chinese government isn’t going to step on their economy so hard that it suffers a hard landing; sovereign debt default fears are unlikely to spread throughout the western world; the Euro’s recent fall from grace is part of the solution for the beleaguered PIGS. Clearly, fears that the political backlash against markets may intensify are justified. But are governments – especially the US government – really going to do something so stupid as to imperil the fledgling global recovery?
Let’s hope that’s not a rhetorical question.
Update: (14.05 BST). Morgan Stanley’s Teun Draaisma is also bullish.
We are OW equities. We think MSCI Europe is attractively valued, and that is one of the reasons why we moved from UW to OW equities on 10 May (NB the 7 May low in MSCI Europe at 1030 is still holding in what so far is a 13% peak-to-trough correction). In addition, the EUREX put/call ratio has moved to an all-time high, implying bearish sentiment, and both our CVI and CMTI indicators are below zero, implying an 80%+ chance of up markets IN the next 6 months. MSCI Europe’s 2011 IBES PE is 9.5x, versus an average trailing PE of 14.5 since 1970.
Here are some reasons why:
Attractive valuations: 2nd highest DY, lowest PE, lowest relative PE ever. Its 2011 IBES DY of 5.9% is second only to Telcos, and it is 36% higher than the market (compared to historical average of 4% lower DY than the market). Similarly, its 2011 PE at 7.0 is the lowest in the market, its relative PE has never been lower since 1970, on our data, and P/EV is one of the lowest ever at 0.9. Average upside to our analysts’ price target in the sector is 37%, which is the highest of all sectors on MS analysts’ estimates.
Some attractive fundamentals. While growth in this sector won’t exceed GDP growth much, IBES expectations are for decent (but below market) earnings growth of 10%, 16% and 8% in 2010, 2011 and 2012. Our analysts point out that one of the attractive features now is that the companies realize that they are not growth companies, and are managing the business accordingly, and they believe the quality of the earnings has increased. Moreover, we like to look at relative earnings revisions as a mean-reverting series, and it is currently rock-bottom for insurance. Our view that equity markets will rise from here will help the high beta nature of the sector. Finally, the threat of severe Solvency 2 regulation seems to have eased in recent months.
Related link:
Austerity and the eurozone economy – FT Alphaville
The Great Depression II – FT Alphaville