Investors eye a buying opportunity
All the talk in stock markets is of bears, corrections and even the end of equities. But could it be time to buy shares?
For all the turmoil in the eurozone, some investors think so. Larry Fink, chief executive of BlackRock, the world’s largest asset manager, this week justified the move to buy back its own shares for $1bn from Barclays by saying that equities were cheap relative to bonds.
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“These are scary times – I’m not trying to suggest they’re not,” he told BlackRock’s annual meeting.
“But I think because they’re scary times, it’s a good entry level to be a long-term investor.”
In the very short term, few in the market believe there will be much impetus for shares until the repeat Greek election, seen as an important influence over whether the country is likely to leave the eurozone, takes place on June 17.
Ed Yardeni, founder of New York-based Yardeni Research, believes a relief rally following that in the summer is likely to be around the corner.
“The European crisis is here to stay, and it is going to be a pain in the backside for a while,” he says.
“I think we have had some good corrections in cyclical stocks. But my relief rally will really be US-led.”
The mood is more downbeat in Europe, not least because the most obvious impediment to sentiment is the continent’s debt crisis.
European indices are among the heaviest fallers this year. Spain and Italy are both in bear markets while eurozone banks and Madrid’s index have dropped below their previous lows in the financial crisis.
Ronan Carr, European equity strategist at Morgan Stanley, thinks that while everything adds up to a buy signal in a normal market, the situation is anything but normal.
“We think there is definitely value appearing in the market and sentiment is very depressed,” he says.
“However, we think you need a fundamental catalyst, and it isn’t there at the moment.”
A look at some of the main valuation and sentiment indicators makes for a nuanced picture. The S&P 500 in the US is down 6 per cent from its April high, compared with a 16 per cent drop in 2010 and a 19 per cent fall last year.
The forward price/earnings ratio for the S&P was at 14.3, 13.2 and 12.9 at the three respective peaks in 2010-12, according to Mr Yardeni.
At the bottoms it reached 11.5 and 10.4, while it is currently at 12.2.
In Europe, last year’s bottom is closer. Mr Carr says the current forward p/e is just above 9, while it hit 8.5 last September.
But he notes that even after it bottomed out, markets remained choppy for several months and only rallied in mid to late November when the fundamentals improved, largely due to the prospect of action from the European Central Bank.
Central bank intervention, whether through further quantitative easing in the US or UK or something similar from the ECB, is one of the two main unknowns.
The other is growth. European purchasing managers’ data this week disappointed, suggesting heavy negative growth on the continent. All eyes are on the US next week, after a mixed to disappointing batch of data.
Sentiment indicators are similarly close to previous lows without actually being there.
The weekly sentiment survey of US retail investors conducted by the AAII last week hit its lowest level in 34 weeks, with 46 per cent of shareholders bearish and only 24 per cent bullish.
The volatile survey rebounded this week, with the bearish-bullish ratio down to 39 per cent versus 30 per cent.
Another measure used by many shareholders is the put-call ratio, which measures how many investors are placing negative versus positive bets on the markets. The US ratio is at about 1.4, just above its level from last year, although below it on a three-week average basis.
Morgan Stanley’s own combined market timing indicator bears this out, with the current level of -0.4 close to the buying signal of -0.5, but a long way off the 2009 low of about -2.5.
So far, 2012 is following the script of 2011 remarkably closely. Such a scenario would mean stocks have some way to fall before responding to a big policy response in the autumn.
Some analysts argue that, absent Greece leaving the eurozone this summer, there might be more of a muddling-along approach this year.
“2012 already looks a lot like 2011, but I’m not wedded to the view that we will see another big leg down, as in August and September last year,” says Mr Carr.
But one well-known name in European fund management says he believes a contrarian buying opportunity is approaching, but things need to get worse first.
“I would like the situation to be even more stressful, and I’m waiting for that to happen,” he says.
“We are keeping some powder dry.”