Markets are fickle things and almost impervious to fundamentals, particularly when they are drowned out by the volume of negative macro noise, but there has to come a point in any cycle when equity valuations hit the bottom and become attractive to more than just the most ardent stock-picker.
While not an advocate of market timing, I am an advocate of looking for the positive signs rather than buckling under the weight of negative comments so now is surely the time to start looking more optimistically at equity valuations.
Surely the corollary to market falls is attractive equity valuations?
According to Société Générale’s latest investment strategy report: “In the United States, the latest economic data indicate a modest recovery in activity, which makes a return to recession less likely.” Given the extent of its problems, using of the phrase “a return to recession less likely” should be music to the ears of some investors.
Then they give more good news: “The results for the second quarter once again provided some pleasant surprises, in all sectors.”
Unfortunately, the positive bubble bursts when Société Générale’s overall conclusion is that developed market equity valuations, certainly for developed markets, “while they might seem attractive in the long term, should be taken with caution given the background of falling profit forecasts. When adjusted for the effects of the economic cycle, the valuations seem reasonable, in line with their previous average value, but not excessively low.”
So what about emerging market valuations?
Bill O’Neill, EMEA chief investment officer at Merrill Lynch Wealth Management agrees, saying it is too early to add to risk markets right now given “political uncertainties within the eurozone and with the jury still out on whether a global slowdown will be fully evidenced”.
Unsurprisingly, he is more positive about his own emerging universe, adding: “The attractive features of many emerging markets, such as high growth rates, low levels of government debt compared to Western economies and an ever growing domestic consumer base, should offer long-term support.”
The key words are evidently ‘long term’; the key conclusion is that equities across the piece are fairly valued not undervalued; the key action is to look at defensive stocks if you are a stock-picker and pick a good stock-picking manager if you are a fund buyer.
Either way, do not rely on stocks or funds that themselves rely on a strong economic climate.
