Stocktake

Compiled by PRONSIAS O'MAHONY

Edwards maintains his apocalyptic line

“THEY laughed. Oh yes, how they laughed. But they’re not laughing now.” That’s the title of the latest note from Société Générale uber-bear Albert Edwards, who has been warning since 1996 that equities were facing an “Ice Age” and who clearly feels vindicated by the latest market downturn.

Edwards is as apocalyptic as ever, warning that hope will be “crushed” as investors realise that policymakers don’t have “any idea what they are doing”. German bond yields will continue to slide to Japanese levels; US bond yields will fall below 1 per cent as hard landings occur in China and the US; the SP 500 will “decline decisively” below its March 2009 low, despite being roughly twice that level today.

Selling month lives up to its name

THE old adage “Sell in May and go away” has rarely seemed more appropriate. The Dow Jones fell by 6 per cent and rose on just five days during May – that hasn’t happened since 1980, and only nine times in the index’s history. The tech-heavy Nasdaq fell by 7 per cent, its worst monthly performance since October 2008.

As Bespoke Investment group notes, however, US declines have been a “walk in the park” compared to the rest of the world. Indices in Japan, Hong Kong, Brazil, Russia, Spain and Italy all suffered double-digit losses in May. US stocks under-performed global indices from 2001 through 2008, but are now at their highest point on a relative basis since October 2004. Despite recent falls, the SP 500 is up by more than 20 per cent over the last two years.

Outlook brighter for Euro stocks

The Euro Stoxx 50 has fallen by almost the same amount during that period. Despite the economic backdrop, one could question if it will continue to underperform. Europe is trading at 11 times its cyclically-adjusted price-earnings ratio, and even Albert Edwards describes that as “rock-bottom” levels. The US figure is 18, which is well above its historical average. European dividend yields, too, are roughly double US yields.

None of this matters in the short term, especially as markets await Greek election results on June 17th. Still, almost half of European corporate profits come from outside the continent, so the extent of the aforementioned valuation gulf is notable. Secondly, studies show economic growth has little if any effect on stock returns; the key factor is valuation. The European economy may grow sicker, but the long-term outlook for European stocks looks brighter.

Pounding goes on for Facebook

FACEBOOK shares continue to be pounded, with the stock last week trading almost 30 per cent below its $38 flotation price.

Unsurprisingly, that’s prompted some unflattering observations. Bloomberg notes that Facebook has been the worst-performing large initial public offering over the past decade, whereas Bespoke Investment Group adds that the company lost $22 billion in market value in less than a fortnight – more than the total market value lost by the next nine largest decliners.

It may bounce, of course, but the wealth destruction may well continue; Facebook remains expensive. It trades at 72 times last year’s earnings, 44 times prospective earnings, 15 times sales and 10 times book value.

Safety first for performance

LOW-risk stocks outperform – everywhere. That’s the contention of a new paper which examined returns in 21 developed countries (including Ireland) between 1990 and 2011, and 12 emerging markets since 2001. The least volatile stocks enjoyed annual returns of 8.7 per cent whereas the most volatile lost 8.8 per cent annually. In the US, the least volatile rose by 12 per cent annually, the most volatile losing seven per cent a year.

The authors add that previous studies that examined returns from 1926-1970 and 1970-1990 "show the same negative payoff to risk". The study is at iti.ms/N31PHA.