A host of fund management firms are predicting low to zero growth in developed markets for the second half of the year and despite attractive stock valuations are reluctant to move into markets.
Bill O’Neill, chief investment officer EMEA Merrill Lynch Wealth Management, said: "Politics and policy are once again the dominant drivers with some real concerns around understanding the dynamics of this very unusual recovery cycle."
He said the correction seen in the third quarter, when equity markets put in their fourth worst performance since 1998 (down 17.9%), showed how correlations had returned to stock markets.
Almost all regions fell, with very few safe havens distinguishable among the rubble.
Despite the hope many have held onto that emerging markets will save the west, they actually underperformed developed markets in US dollar terms over the period, with falls of 23% compared to 17%.
On this note Societe Generale said it favoured the US market for its recovery prospects due to its defensive character and an economic policy that is still extremely accommodative.
It added that corporate results for the second quarter in the States had presented pleasant surprises, although cyclicals and financial stocks had taken a bigger hit in the past two months.
Elusive entry point
Both Societe Generale and Merrill Lynch pointed to extremely low valuations, but they warned that was not in itself reason enough to enter the equity markets.
O’Neill said while he still preferred equities over core government bonds on a 12-month view, the 6% difference in earnings yields between equities and bonds is not enough to entice investors back to the asset class.
The fourth quarter will be dominated by the euro crisis and a number of headwinds need to be confronted before the outlook is seen to be more positive.
The increasing likelihood of a Greek default must be addressed, contagion risks dealt with and double-dip fears laid to rest, according to O’Neill.
He said only then will investors commit to equities in an agressive way.
Societe Generale said it is reducing exposure to commodities (with the exception of oil), industrials and chemcials and sees the best opportunities in non-cyclical consumer plays and health.
