An independent and objective view of equity markets based on BCA analysis

Global Equities: Bear Market Or A Correction? (Part 1)

The recent sell-off is rattling many global equity investors.

Global equities have corrected sharply in the past month (down 9% since May 9th). Given that the duration and gains registered in the advance that began in March 2003 have already substantially surpassed those of a typical bull market, many investors are questioning if the current downturn marks a trend change. Clearly, risk aversion is on the upswing. U.S. investor sentiment toward equities has soured markedly. Investors outside the U.S. seem to be equally nervous. Driving the current downturn are inflation concerns and ramped-up hawkish Fed rhetoric, which is contributing to economic growth concerns.

Global Equities: Bear Market Or A Correction? (Part II)

A moderation rather than a slump in economic and profit growth is likely in the months ahead.

Fears of a monetary policy squeeze have resulted in a growth scare, which is corroborated by the rolling over in BCA’s Global Leading Economic Indicator. While growth may downshift from the robust pace of recent years, we should not necessarily expect a major slowdown to unfold. Slower growth should temper inflation concerns, ensuring that central bankers do not tighten too much and capping bond yields. Meanwhile, corporate balance sheets are still in good shape. Capital spending as a share of cash flow remains low, and businesses have been expanding payrolls very cautiously. With costs relatively low for this stage of the cycle, a moderation in top-line growth should not translate into a major profit squeeze. Global equities should also be supported by attractive valuations.

Global Equities: Bear Market Or A Correction? (Part III)

The recent bout of global equity market weakness is not the beginning of a bear market.

Global equity valuations are attractive! The forward P/E ratio is low, and the real bond yield minus the forward earnings yield is currently in a “stocks inexpensive” zone. While a moderation in global economic growth will result in a downgrading of earnings expectations, a profit recession is not in store. Moreover, a reduction in economic growth expectations could result in lower real bond yields, which implies the valuation argument will continue to favour equities. The current period of market weakness is the natural consequence of a three-year plus bull market.

Bottom line: the underlying equity outlook remains positive!

TECHNICALLY SPEAKING………….

FTSE-100 (5669) staged a powerful rally on Thursday, and this has followed through this morning (Fri) thanks in no small measure to strong performances on Wall Street. These gains are not only a tonic for traders – they are also significant from a technical point of view. Recent FTSE price action was looking a lot like a bearish flag, but in order for that technical pattern to be confirmed we had to get a break down through the lows at around 5500 or so. 5500 has become an important level, and it is now quite clear that there is some support there. However, before we get too carried away it is important to be aware of the fact that the leading index is going to have to break back through the top of this recent congestion band i.e. above 5800 - only then will we be able to start talking about a bottom having been formed. For upside momentum to be maintained it is important that the FTSE ends today’s session above 5676.

And finally…………………

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.