#Investments — 15.01.2016


Roger Keller

China news and oil price related concerns continue to weigh on equity markets. For how long?

In brief

The news flow remains clearly negative. It is however not centered on economic prospects, which remain reasonably attractive. Some technical indicators are beginning to show that this correction is reaching quite an advanced stage. Fundamentals should at some stage reassert themselves and lead to prices recovering.


China remains at the center of attention but concerns on the oil price outlook are not far behind


Chinese stocks fell by more than 3% last night in Shanghai and by close to 3% in Hong Kong. They suffered from reports that banks will now only accept shares of CSI300 constituents for pledges and that the collateral ratio is being cut from 50% to the 35%-40% range. In addition, oil prices are put under pressure by a possible lifting of sanctions against Iran as soon as next week. Less visible in the news, but nonetheless of big importance, is the fact that earnings downgrades far outweigh earnings upgrades.


The fundamental outlook remains positive, not spectacular but positive


According to leading indicators, the global economy should remain on its growth tracks. There are even encouraging signs of bottoming, such as the improvement in the diffusion index of leading indicators. Developed economies have the best prospects, with declining unemployment rates, rising wages and positive readings on consumer confidence indicators, among others. The outlook thus seems positive for consumption, which contributes more than 60% to GDP. In addition, fiscal policies this year are becoming a slight backwind. Capital spending plans are, however, unlikely to gain much strength. If economic activity keeps growing, the implication is that earnings should keep going up, unless margins come under pressure, which is not our scenario, particularly outside of the US.


The technical picture is improving


Institutional and individual investor sentiment has reached capitulation levels. Breadth indicators are also sending more encouraging readings, such as the proportion of stocks below the 200-day moving average, which has now gone down to levels not that far from those prevailing at the market lows in 2009 or 2011. Other indicators, such as the VIX, are however not yet at extreme levels.


The bottom line is that we remain constructive on equities for 2016


The upside will rely on earnings growth. It is expected to be single digit. Valuations are likely to remain stable, which is not surprising at this stage of the economic cycle. Dividends will be a significant contributor to the total return of equity investments. Among our main themes for 2016, we recommend considering dividend growers.