Stocktake

Compiled by PRONSIAS O'MAHONY

Global markets get off to a flyer in the first quarter

EUROPEAN and Asian stocks slipped last week but it has been an impressive quarter for global stocks. Japan and Germany are the top-performing G7 countries, indices rising by 19 per cent and 16 per cent respectively. Of the BRICs, Russia (17 per cent), Brazil (13 per cent) and India (10 per cent) have all enjoyed strong gains, although China could only eke out a 2 per cent gain.

In the US, the SP 500 secured double-digit gains for the second consecutive quarter, rising 11 per cent. The Nasdaq soared by 19 per cent – its fourth-best first quarter in history. Market breadth indicates the rally may be tiring.

The net number of NYSE 52- week highs peaked at 280 in February. By March 26th, the SP 500 was up 5 per cent, but the net number of 52-week highs had fallen to 168, indicating that the heavy lifting is being done by a reduced number of large-cap stocks.

Bullish sentiment goes into overdrive

IS MARKET sentiment becoming excessively bullish? The most recent Merrill Lynch monthly survey of global fund managers found that only 7 per cent expect euro zone earnings to fall in 2012, down from 84 per cent in December. The net percentage of managers overweight in cash has fallen to 6 per cent, from 40 per cent last October.

In the US, broker Charles Schwab’s survey of its most active clients reveals bullishness unseen since its survey began in April 2008. Weekly surveys by the American Association of Individual Investors reveal that bullish sentiment has been above historical averages for 15 of the last 16 weeks. Bearishness has been below its historical average for 13 of the last 14 weeks. Ned Davis Research’s sentiment index is at 68 per cent – above 61.5 per cent is “extreme optimism”.

Big firms have bad timing on buybacks

SHAREHOLDERS tend to view share buybacks as a vote of confidence in the company, but Apple’s recent decision to repurchase $10 billion in shares might seem like poor timing, given that prices are at all-time highs.

Société Générale recently noted US companies were using almost 40 per cent of cashflow to buy back shares in January 2008, not long before prices crashed. By the market bottom in March 2009, that percentage was 19 per cent and below 6 per cent in 2010 (a great year for stocks). They then upped spending to 19 per cent in 2011 (a flat year for indices). A recent study showed that smaller firms tend to buy back shares when they become undervalued.

Study shines a light on value of ETFs

EXCHANGE-traded funds (ETFs) have been one of the most successful financial products of the last decade. They now control $1.5 trillion in assets globally, having grown at an average annual rate of 40 per cent during the past 10 years. ETFs give investors easy, low-cost access to diversified indices, but do they actually benefit investors?

No, according to a study that examined data from a big German brokerage. The problem is that ETFs can be traded throughout the day, like a stock, and over- trading occurs. This, the authors say, “curbs one temptation [stock picking] on the one hand, but it encourages another temptation [factor timing]”.

The study is at iti.ms/HlUPUz

Most investors can’t beat the market

INVESTORS’ inability to beat the market is confirmed in a study that also examines data from a German online broker between 2005 and 2010.

Looking at 8,621 individual portfolios, it found that 89 per cent of investors showed “negative skill” on a gross basis. The average investor will underperform the market by 7.5 per cent a year (8.5 per cent after trading expenses) due to “insufficient skill”.

The study is at iti.ms/H2rmM0