Why Are We Still Positive on Risky Assets?
January 2016 is the worst start of year on record but we think fears are exaggerated.
The MSCI AC World index is down 20% from its May 2015 high. The oil price slump and concerns about a hard landing in China drove the decline to begin with. Recently, investors have begun talking about the risk of recession in the US and major fears for the banking sector. Fundamentals remain far better than the prevailing pessimistic sentiment. We therefore keep our positive stance on risky assets.
We consider fears much exaggerated.
The issue for oil is excess supply, not lack of demand.
The transformation of China’s economy is sending contradictory signals. Overall, the most likely outcome is a soft landing. The authorities still have considerable leeway for providing support to the economy, including tax measures and further reforms.
The US economy is still on a growth path, albeit more moderate. Fears of a recession are, in our opinion, completely incompatible with the increase in hours worked and in hourly wages, with the new orders component of the ISM manufacturing PMI rising back above 50, with the upturn in the ratio of new orders minus inventories …
The banking sector is indeed in some difficulty (oil sector loans, bad debts in Italy, etc.) but its stock market valuation reflects fears that are exaggerated since the sector is now better capitalized and there is stronger regulation.
Looking beyond short-term stress, fundamentals are pointing towards an upturn in prices before the year end.
In our previous messages, we referred to various technical and sentiment indicators that were emitting buy signals. Others, on the contrary, had not yet reached that stage. We are thinking in particular of indicators for capitulation and volatility peaking. It would appear that we are rapidly nearing this stage.
In the short term, it seems difficult to pinpoint which factor could trigger a change in direction. However, measures to counter market negativity could be announced at any time. The trigger could come from the oil sector, the Chinese or Japanese authorities or authorities in other countries, or from the coming G20 on 26 and 27 February.
In any case, our analysis of fundamentals leans towards moderate global growth, driven by domestic demand in mature countries. This should lead to a single-digit increase in earnings in 2016. Given that valuations do not constitute any constraint, equities have good recovery potential.
We keep our marked preference for the Euro-zone and Japanese stock markets over the US bourse, which is further along in the cycle.
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