US equities could be in line for a secular bull market as soon as next year, but European stocks should be handled with care.
That is a synopsis of the latest thinking from Citi. For more details read on:
US
Citi’s US equity strategy team reckons the current skepticism towards equities, as reflected in flows out of stocks into bonds and general pessimism towards the stock market, is overdone.
Indeed, it offers three reasons why a secular bull market could emerge in the next year or two:
1. The new crop of retirement savers from the so-called “baby boom echo generation” will enter the stock market without the wounds or baggage of their parents (some of which got burned).
2. It is “highly likely” that the US will have to deal with its fiscal issues by 2014, which should remove a major factor that has restrained stock valuation due to a heightened inherent equity risk premium. Bond markets will force a resolution if politicians do not address the problem before then, Citi predicted.
3. Positive changes in the US housing sector, which has been a major drag on GDP trends for some time, could have a positive impact on equities. The US excess housing stock will essentially be depleted by the middle of 2012, and while there will still be foreclosures, those units may end up being rentals to the people living there now, Citi predicted.
Europe
Understandably, Citi is somewhat less positive on Europe (a continent it calls a “hot-bed of political risk”) and recommends treading carefully.
However, a lot of bad news is now priced in and earnings will only suffer if the market heads towards a repeat of 2008-09, something Citi predicts will not happen.
Europe now trades on a significant discount to the rest of the world and is in competition with Japan and emerging Europe for the title of cheapest equity region.
On a price/book basis, Europe trades on 1.21x, or 28 per cent below post-1980 average levels but above the 2008-09 trough of 0.98x. Europe also looks cheap on a cyclically-adjusted P/E basis and is trading close to 2008-09 and early-1980s lows.
And downside risks are limited beyond the bottom of current trading ranges –205-255 for the Stoxx 600 index and 4700-5700 for the FTSE 100 index –Citi noted.
All pile in then? Not exactly. Morgan Stanley’s emphasis on wealth preservation rather than wealth generation seems sensible.
Related links:
European equities – trick or treat? - FT Alphaville
We are in a secular bear market – FT Alphaville