Stocks close to capitulation - ING's van Tiggelen

PARIS Fri Jul 11, 2008 4:16am EDT

PARIS (Reuters) - The equity market is getting close to capitulation as consumer-related worries continue to hit food and retail shares while fears of bank failures knock financial stocks lower, said ING's Ad van Tiggelen.

"If you look at oversold levels, we are already there. We're clearly in a bear market which may last until the end of this year or sometimes next year, and we might be reaching the bottom at the moment," van Tiggelen, senior strategist at ING Investment Management, told Reuters on Thursday.

"The problem is there is no place to hide, utilities are going down, staples are going down, now even the materials and oils are going down. Unlike in March, insider buying is very muted because management themselves are much more pessimistic now," he said.

"We think we are close to capitulation levels and that valuations are becoming quite supportive now," he said, pointing out that stocks will soon be poised for a bear market rally.

Capitulation is a market concept describing heavy, sometimes panic selling of stocks and sharp declines. It heralds the bottom and a beginning of an upturn as the belief is that everyone who wants to sell has sold.

The benchmark FTSEurofirst 300 .FTEU3 index of top European shares, which lost 2 percent on Thursday, is down 22 percent so far this year, hit by stagflation fears and worries over the impact of a crisis in the credit market on banks' books.

"With an oil crisis happening in the same time as a credit crisis --sparked by leverage levels we had never seen before--, there are so many moving parts that it's impossible to compare the current market with the past, that's why the outlook is so uncertain," he said.

Consumer-related shares are particularly vulnerable, van Tiggelen said, pointing out that stocks such as French supermarket Carrefour (CARR.PA) could fall below their 2002-2003 lows, while stocks in the manufacturing and industrial sectors should prove more resilient.

Shares in Carrefour sank 8.6 percent on Thursday after the French retailer's second-quarter sales at its hypermarkets showed clear signs of a consumer spending slowdown. The stock has lost 28 percent in a month.

Banking stocks also remained under high pressure, the analyst said, as on top of the negative effects from the meltdown in the risky U.S. subprime mortgage market, investors fear that a recession would trigger higher provisions for bad loans.

"In the early 90s, banking stocks bottomed at a price-to-book ratio of about 1, and now we are back to price-to-book around 1. The bulls are saying: "buy banks now", but the bears are saying: "how trustworthy are the books?". I tend to agree with the latter view," the analyst said.

SHORT-TERM REBOUND

"We can't deny that there are fears of systemic risks again on the market, otherwise you would not see these stock levels, but they are a bit overdone, certainly regarding the big banks," van Tiggelen said.

The analyst sees another round of rights issues launched by banks, of about $100 billion to $150 billion.

Despite the gloom, the analyst said the fact that the market is so oversold could trigger brisk upward corrections in the coming weeks that could offer good opportunities.

"The biggest short positions are on banks and automakers. That's where everybody is 'underweight' and where hedge funds have huge short positions. We have doubts about the outlook for the sectors, but we are neutral on the short-term because we might get a short-covering rally as soon as oil prices decline a bit, or if we get some snippets of good news," he said.

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