By: GZ on Lunedì 05 Novembre 2007 04:21
il tizio di Morgan Stanley che ha la mano calda, ha dato il sell a fine giugno e il buy in agosto cosa dice oggi ?
Europe Equity Strategy
The Rally Is Not Over
October 29, 2007
By Teun Draaisma
No need to sell until the next Fed rate hike. Today we present new analysis on periods of Fed easing, from the first cut to the first subsequent hike. Valuations aside, history teaches us that if you believe in a mid-cycle slowdown rather than recession scenario, as we do, equities do well until the next Fed rate hike comes through and then struggle more after that. Where it could be different this time is that the Fed under its new chairman may wish to increase rates sooner than in the past, and the next Fed rate hike would be an even more important turning point than usual. Our US economists expect two more 25 bp cuts by the Fed, one this quarter, one next. They expect the first hike in 2009.
This is a bad earnings season, but not a new trend for earnings, in our view. The current quarter is the first of negative year-over-year EPS growth in the US since Q1 2002. Also, European earnings revisions are negative for the first time since the 2000-03 bear market, apart from brief periods in 2004 and 2005. Margin pressure and weakness in Financials dominate. If this is the new earnings trend it does not bode well for equities, obviously, but we do not believe this is a new trend. Fundamentals are risky but still point to a mid-cycle slowdown, not a recession. Market-based measures of growth are not suggesting a recession (commodity prices, Baltic Dry index, bond yields), and inflation is not yet a problem, so rates can still come down and stabilise the growth outlook. Recent data have supported this idea, such as payrolls, retail sales, ISM surveys and inflation releases. Our recession-risk model suggests a 23% chance of a recession, way below the 70% critical threshold. Our Earnings Growth Leading Indicator (EGLI) suggests close to 20% EPS growth for the next 12 months, way above IBES consensus 9% for 2008, and way above our own much more conservative top-down estimate of 6%.
We continue to be optimistic on equities, but we flag that valuations and sentiment have recovered to more normal levels. As of Friday, MSCI Europe is up 10% since the trough two months ago, and we see another 10% upside to our 1750 target for MSCI Europe. We started buying in mid-August because valuations were attractive, sentiment cautious, and the fundamental outlook pointed to a mid-cycle slowdown. Revisiting these three areas today, nothing makes us want to change our positive outlook.
Valuations: CVI in the neutral zone, other market timing indicators still in buy mode. The CVI, which was close to -1 standard deviation cheap in mid-August, is back in the neutral zone at +0.4 standard deviation. There is no need to sell before we reach the important +1 threshold, and even that sell signal is often early. Our Fundamentals, Risk, and Composite Market Timing Indicators are all in buy territory.
Sentiment has recovered, but we have not seen the flows yet. In Europe we have not seen excessive sentiment levels yet, and flows from the retail investor have been very subdued. Current sentiment levels are more elevated than they were, but are not worrisome, in our view.
When to sell, then? We would start to consider selling if one of three things were to happen. 1) valuation sell signal(CVI>1, other market timing indicators in sell territory too); 2) the next Fed rate hike could signal an important turning point; and 3) when US 10-year bond yields pass 5%, the equity market outlook gets more risky due to inflation or rate pressures.
Recommended trades. We are overweight equities, neutral cash, and underweight bonds. We are overweight Tech, Materials, Insurance, Banks, Pharma, and underweight Energy, Staples, Autos. We prefer large caps over small caps. Stocks: 15 stocks in our European Model Portfolio: Sanofi, Roche, AXA, CS Group, ASML, SAP, Tele 2, Michael Page, Burberry, BASF, H&M, Alstom, EADS, Rio Tinto, Nestle.
Stock prices: Sanofi-Aventis (€59.39), Roche Holding (Sfr 204.2), AXA (€30.08), Credit Suisse (Sfr 77.9), ASML Hldg (€24.26), SAP (€37.95), Tele2 B (Skr140), Michael Page Int'l (443p), Burberry Group (632.5p), BASF (€96.57), Hennes & Mauritz B (Skr 420.5), Alstom (€152.67), EADS (€23.86), Rio Tinto (4206p), Nestle (Sfr 513.5)