An extract of the January 2009 edition of Investment Strategy:
Little enthusiasm for equities despite stabilisation
Since December there has been some respite in the decline of equity markets, as seen, for example, by the decrease in volatility of S&P 500 firms as measured by the VIX index. Although it cannot be said that the major equity indices have bounced back from their sharp drops since September, they have stabilized above their lows of November. The improvement in the VIX is much more substantial, since it has fallen from 80% on November 20th to around 40% so far this year. It is as if investors have become immune to bad news about the economy and lower earnings forecasts and don’t react when more comes along, although they don’t believe however that the crisis is over.
More than announcements will be needed
Last month central banks once again stepped up their efforts to get credit markets back on their feet. By cutting key interest rates to extremely low levels and implementing quantitative measures, monetary authorities are redoubling their policies to avoid deflation in addition to recession. The steps taken worldwide are in keeping with the magnitude of this historic crisis in financial markets and should prevent its impact on the economy from reaching similar proportions.
Clearly investors, consumers and firms do not intend to make long-term commitments in form of the investments, large purchases or capital spending solely on the basis of government announcements of plans to support the economy. Caution is the watchword everywhere and the outlook is mostly pessimistic, as may be seen by the downward revisions of growth forecasts worldwide.
Little near-term visibility
The initial effects of the fiscal stimulus measures announced over the past few months will probably not be felt until the middle of this year, although those measures that can be implemented most rapidly, such as rebates on new car purchases in some European countries and tax cuts in United States, may come into play earlier. Although this prospect could normally be expected to calm investor nervousness, this ray of sunshine apparently cannot get through the large dark cloud that currently hovers over financial markets. Although both investors and economic agents are convinced of the utility of the monetary and fiscal measures they prefer to “wait and see”. The recession will of course weigh heavily on corporate earnings in 2009, a prospect already reflected in share prices to some extent.
The interbank market provides a good illustration of this excessive caution. Despite the extremely solid guarantees provided by the central banks it is taking a long time to “thaw”.
Given the magnitude of the stock market plunge in 2008 we could see a rebound early in the year as investors start “shopping for bargains”. But even though equity valuations are not expensive, we do not expect to see a more sustained recovery until it becomes more apparent that government measures will be effective. Given this situation, the current skittishness of investors and the likelihood of sharp fluctuations in share prices, we have decided to maintain neutral exposure to equity markets over the near term.
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“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management’s portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).