HSBC exec sees sustainable rally in equity markets before year-end
THE US economy is likely to bottom this year and equity markets should stage a sustainable rally before year-end, says HSBC Investments chief investment officer Leon Goldfeld.
But there will be no rally until the market sees signs of an economic turnaround, he says. The key metrics are a slowdown in job losses and housing inventory.
'I still believe the second half will kick-start a rally that is sustainable, particularly for this region,' he says. 'In a sense, I'm an optimist with a time lag - perhaps in the third or fourth quarter.
'Between now and then, we're likely to be in a volatile range. Investors should focus on buying the dip rather than selling on a rally. If the market does dip, it's a very good time to accumulate, particularly in May and June as it gets closer to a trough.'
This year so far, global MSCI indices are down 8-9 per cent. Asia ex-Japan has fallen more steeply, about 12 per cent. Volatility, measured by the VIX index, has trended down after peaking in March.
Mr Goldfeld says that financial stress will continue to generate bad news. But he points to some potentially contrarian signals. One is that while the financial sector is expected to write off up to US$800 billion, roughly US$1.3 trillion of bank stocks' market capitalisation has already been wiped out. Part of the downdraft reflects the expectation that banks' profitability will fall in the future, as fee income from securitisation shrinks.
In terms of valuations, global equities are trading at a price earnings multiple of about 14 times, and Asia about 12 times. 'The market is building a buffer for negative years. Analysts have a positive earnings consensus, but the market is discounting a 20 per cent decline in earnings,' Mr Goldfeld says.
Fund managers are overweight on cash. Surveys of investment advisers are uniformly bearish, which historically has been a good short to medium-term contrarian signal. Credit spreads have also widened to the level of previous recessions. US corporations, however, entered the downturn with strong balance sheets and low gearing. These strong financials are one reason that the economic downturn is unlikely to be deep, and unemployment at 4.5 to 5 per cent is relatively tame.
One caveat is that the recovery, when it occurs, is unlikely to be sharp. 'My suspicion is that as banks have to repair their balance sheets, the recovery will be relatively subdued. US growth may be anaemic for a year or two, but 2008 should be the trough,' says Mr Goldfeld.
He is most optimistic on Asia, where he believes that asset prices could reach bubble proportions after markets begin to rally.
'Once we hit a bottom, I think we could rally very high especially in Asia and the emerging markets,' he says. 'There is a massive amount of cash in the system. Treasury bills are yielding 0.5 per cent. No one will live with that. Once things improve, people will take risk and it will be in areas where there is confidence and high growth expectations. Once people sense the trough, you can easily see 20 per cent in gains in two months. That's the historical pattern.'
In its latest report, BCA Research says that scepticism appears to be entrenched in the US market, which is 'eventually positive' from a contrarian standpoint, 'especially within the context of good value and record setting stimulus efforts'.
Net repurchases of own stock by the US corporate sector hit a record high in the fourth quarter. BCA says that while it would be more bullish if corporate resources were directed towards expansion, equity repurchases do confirm that valuations are attractive.
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