Jun 4 2008
The turmoil that has characterised global financial markets since last summer shows little sign of abating, according to the Invesco Perpetual Investments Topics report. It states that if an equity bear market is considered to be one which experience a 20 per cent drop in the value of the stock market, then just such a market is now a reality. The report sounds what seems like an even more pessimistic note about the state of the UK economy claiming that there is "a good chance" of it going into recession. However, this is not as grim a situation as people might imagine. While there might be tough times ahead, the outlook for the equity and credit markets are actually quite attractive. According to the report some good opportunities have been created by recent events. "We see many companies trading at calculations which we consider very attractive, especially when judged on a three to five-year investment time horizon", the report states. Further good news is provided by the fact that the current bear market has strong similarities with the ones seen in 1987 and 1998 - both of which were very short lived. UK equity markets have recently experienced some "unusual" dynamics and despite recent losses there is no need for a "fundamental change of strategy", the report concludes.
Further afield, Keith Skeoch, chief executive of Standard Life Investments agrees with the assessment that volatility is here to stay, at least in the short-term. Writing for the firm's Global Outlook report, he states that events such as the collapse of US investment bank Bear Sterns caused shock waves in the market and this led to a speedy response from policy makers. However, this will not be the end of intervention by central banks and regulators as they seek to calm the trouble waters, he stated. But Mr Skeoch warns investors not to expect miracles and to instead adopt a new attitude. "It's at times like this that an investor must adopt a longer term timescale. See whether the overall balance of the portfolio remains sensible and look for oversold assets which can be bought cheaply," he said.
Meanwhile, Richard Batty, global investment strategist at the firm, states that US and Japanese equities seem to offer value at the moment with an "abnormally large" number of firms in these markets offering divided yields higher than those of government bonds. He adds that UK investment grade credit is current "pricing at a default rate worse than that seen in the 1930s depression". This despite the fact that actual default rates are close to the lowest ever recorded.
Lance Philips, head of overseas equities at Standard Life, suggests that aluminium might see an increase in price similar to other metals. He points out that while the cost of copper, gold and platinum has rocketed in recent years, the less illustrious metal has remained relatively stable. Although aluminium is still relatively abundant, the increased cost of producing it, combined with growing demand from China could lead to a price rise.
The Threadneadle Bull and Bear Report for May also agrees that UK equities are attractively priced, especially when compared with gilts. The fact that interest rates are likely to fall and exporters will benefit from a weaker pound is also good news for markets. However, inflation also remains high, earnings downgrades are likely in some areas and the housing market is weakening, presenting a threat to consumer spending.
The report paints a similar picture of the US equities market, adding that the Federal Reserve's efforts to maintain liquidity are helping to calm the market. But the prospect of further rate cuts is unlikely and the US economy is approaching recession, although as we have already seen this might not be a terrible situation for investors.
Further afield Japan might be about to emerge from the long period of economic malaise. According to Threadneadle the country is once again experiencing inflation, ending Japan's deflationary period. The nation is also set to benefit from demand from other Asian countries as they look to expand.
Emerging economies themselves might offer investment opportunities, with the report pointing out that strong infrastructure development and healthy consumer demand are helping to support equity markets in such areas. Corporate earnings growth is still strong and high commodity prices are benefiting producers such as Brazil and Russia. However, some markets as still haunted by the spectre of inflation and such areas "remain vulnerable to risk aversion outflows in times of volatility", the report states.
The Invesco Perpetual Monthly Market Roundup Overview sounds a largely optimistic note, pointing out that US stock markets rebounded strongly in April and suggests that some investors think that the worst of the credit crunch is over. It also points out that corporate earning "generally proved solid, buoying sentiment in the market".
A similar situation was seen elsewhere. "The UK equity market staged a sharp rebound over April, with bid activity and corporate earnings providing much of the momentum. For instance, the market was supported by news that mining company BHP Billiton was poised to make a higher offer for rival Rio Tinto." Strong results from US companies such as Intel, JP Morgan Chase and Coca-Cola have also helped boost markets across the globe it adds.
The theme of a rebound is reflected through out the rest of the world with European, Asia and emerging countries all seeing an increase in stock markets. Indeed the MSCI Emerging Markets index increased by 7.9 per cent in US dollar terms over the course of April, a better return than developing markets managed to register, the report points out.
However, writing in the JP Morgan weekly strategy report David Sharp strikes a different note to others, recommending that investors might want to steer clear of European market. While valuations look attractive, Mr Sharp fears that inflation might erode profits. UK equities might fare slightly better, with markets already valued at levels similar to previous downturns. "Unless this is not a normal cycle, this suggests that business cycle risk is already reflected in market prices," he concluded.
