| LONDON, March 22
LONDON, March 22 More dogged than complacent,
global investors appear determined to stay the course with
equities, betting on a bumpy and protracted economic healing.
The first quarter of another turbulent year comes to a close
next week with no shortage of potential prompts to cash in on
what for some was a counter-intuitive bull run in the major
stock markets to five-year highs.
Amid a messy bailout in Cyprus, inconclusive Italian
elections and the beginnings of U.S. fiscal tightening,
developed market equities have clocked up almost 10 percent in
U.S. dollar terms since January 1.
But for all that the drama in Cyprus and elsewhere has put
risk radars back on alert, and despite some unease about
overcooked market prices, few strategists or asset managers are
shouting 'cut and run' into the new quarter.
That's not to say they believe some correction is not
possible or even likely, just that investment decisions in 2013
so far have largely been based on a bigger strategic picture
than tactical trading on the daily or weekly ebb-and-flow.
"The biggest risk to our positive view on equities is simply
how far and fast they have come already, and the fact that
everyone seems to have jumped on the bandwagon," said Barclays
Head of Research Larry Kantor.
But "with a supportive growth and policy environment and
valuations that overwhelmingly favour equities over fixed
income, we recommend that investors buy on dips."
The calculation is that as long as the world's major central
banks continue to use super-easy monetary policy as the default
tool to buoy damaged economies, then relative and historical
valuations continue to favour equities over real losses in
effectively yield-capped 'core' government bonds and cash.
The absence of panic over the Cyprus drama, which in prior
years would have sent funds running for the investment bunkers,
is revealing about those priorities if nothing else.
"Europe's valuation discount remains too high even with the
region's complications and occasional dalliance with
dysfunctionality," said Jeff Taylor, Head of European Equities
at Invesco Perpetual. "Our valuation-driven investment strategy
remains unchanged by Cyprus: overreactions are there to be
And the ease with which Spain on Thursday sold more than
four billion euros of new government debt, at lower yields than
previously, illustrates how confident investors feel that the
European Central Bank can limit any systemic Cyprus fallout.
"New and disruptive systemic risks do not seem on the
horizon, barring unforeseeable geopolitical shocks," Credit
Suisse strategists told clients. "Equities' upside potential in
such circumstances depends primarily on the path of real
For the moment at least, the shock factor is not there for a
marketplace now well accustomed to serial shocks over the past
five years. For investors planning strategies in January, the
'event risks' that we've seen in the first quarter - Italy,
Cyprus, the U.S. sequester - were already there in the diary.
While that doesn't guarantee a positive outcome, few could
claim to be blindsided.
PATIENCE ON GROWTH
But is still-spluttering global and regional growth not
cause for a rethink?
Record highs on U.S. stocks can at least be partly explained
by a pickup in domestic growth there helped by structural
tailwinds from a housing recovery and a manufacturing boost from
cheaper shale-related energy prices - not to mention open-ended
Federal Reserve money printing.
But there's little evidence elsewhere that raw economic
growth rates alone are driving prices. If they were, then
emerging markets would not be the big laggards of 2013 so far.
European economies remain largely stagnant, but the
FTSEurofirst 300 index of the region's top companies is
up more than 5 percent this year. Bellwether stocks of the still
fast-growth emerging economies, meantime, have lost
almost 2 percent on aggregate.
One reason for the divergence is that the big multinational
blue-chips which dominate benchmark indices in the United
States, Europe or Japan riff off aggregate global growth rates
while many emerging markets are still dominated by exporters to
the depressed West.
And while the global growth picture isn't necessarily
pretty, it has picked up in the first quarter nonetheless.
Even as European business sentiment disappointed again in
March, JPMorgan economists reckon worldwide surveys show global
factory growth running about 2.5-3.0 percent annualised this
month, underpinning their call for a jump in world GDP growth to
2.7 percent in the first quarter from 1.6 percent late last
So it's in the light of that sub-par but stable global,
rather than local, picture that cheap valuations shine.
According to Goldman Sachs, cyclically adjusted
price/earnings ratios for German and French companies are still
some 30-40 percent below long-run averages, for example, while
Spanish and Italian equities are more than 60 percent below.
And while it's possible these are fairly valued given the
current regional ructions, Goldman reckons high Equity Risk
Premia - gauges of earnings growth and dividends over
alternative benchmark bond yields - are still attractive for
long-term investors if the economy just normalises over time.
"Even allowing for a 125 basis point decline in margins over
the next 10 years, we find current pricing is consistent with a
long-term real total return in line with the historical average
of 5.9 percent," the bank's strategists told clients on Friday.