investors may see cheaper equities but less value

Deutsche Bank’s Francesco Curto predicts a further fall in equity markets which will force investors to look for more than just value.

investors may see cheaper equities but less value


The phrase “cheap for a reason” has been greatly used in the past few months as stock-pickers look for opportunities in markets where prices are falling. But the reason these stocks are cheap is changing which in turn will affect where they value is to be found.

Equities, Curto suggests, may be 16% undervalued from a long-term perspective but the risks of a full-blown crisis and a prolonged recession are undoubtedly rising.

“A prolonged period of government bond yields at 5% for Italy and Spain would be a negative for the world economy and for equities. It may take time for the full effects of the summer turmoil to work their way through the global economy, but in a worst case scenario, we could still see global equities falling a further 23% from current levels,” he suggests.

He does feel that the time to look for value is when momentum is negative, like now, but just screening for value will not be enough.

He says: “In a worst case scenario, the primary risk for investors is not related to earnings (a cyclical component of valuation), but to liquidity, i.e., the possibility that the company runs out of cash (financial risk). “

Investors need to look for companies that are pricing in a recession but that are also strong enough to survive it.

In terms of sectors, he puts forward energy and materials above discretionary and industrials given valuation and balance sheet risk. His defensives view puts staples and healthcare above utilities and telecoms.



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