After false dawns, equities prime for upturn

By Natsuko Waki - Analysis

LONDON (Reuters) - After a number of false dawns which betrayed investors over the past year, equity and other risky asset markets may finally be shaping up to convince long-term money managers of unprecedented buying opportunities.

Having lost a third of their value, world stocks have rallied in the past few weeks thanks to an aggressive round of official interest rate cuts and government measures to calm markets.

The MSCI world equity index rose 23 percent last week from October's five-year troughs, oddly qualifying for a bull market -- a rise of 20 percent from a cycle low.

While the common feeling is far from bullish and the global economy will no doubt endure a sharp slowdown from here, signs emerging in various corners suggest markets for risky assets will price in a recovery months before the economy starts to trend higher.

Morgan Stanley's market indicators -- valuation, capitulation, risk and fundamentals -- now give a "full house" buy signal for European stocks for the first time since 2002.

Valuations on the S&P 500 index, based on price to earnings ratio, are below lows reached after Black Monday in 1987 while U.S. dividend yields are approaching U.S. Treasury yields.

Interbank lending rates in most major currencies are starting to ease at last, reflecting glimmers of confidence returning to the banking system.

"This is the start of a recovery. Although we do assume a late December/January setback, we probably will not have a reversal which will take us back to mid-October lows," said Bob Parker, vice chairman of Credit Suisse's asset management arm.

"Every time we have a period of weakness, we should use it as a buying opportunity."

Credit Suisse has bought large-cap defensive and underleveraged stocks in G3 countries and closed short positions to go flat on commodities.

"We think developed equity markets from here will go up 5-10 percent ... For long-term investors, the intelligent answer is to average into markets over the next 6 months," Parker said.

Credit Suisse says the P/E ratio on trend earnings, at 12.6, is some 10 percent below the December 1987 and October 1990 troughs.

Barclays calculates that equity markets tend to trough after government interventions in financial crises, rising 54 percent on average in the subsequent year, and underperforming crisis sectors become outperforming recovery sectors.

The adjustment of dividend yields and the U.S. Treasury yield also illustrates how attractive stocks have become.

BNP Paribas says the S&P 500 dividend yield -- a measure of how much cash flow an investor gets from investing in stocks -- has risen close to 3.5 percent, approaching the 3.7 percent yield offered by 10-year U.S. Treasury bonds.