Europe offers better value


US political squabbling may be worrying investors but the real issues are market valuations and the looming tapering of monthly bond buying, according to Alain Bokobza, Société Générale’s global head of asset allocation.

He predicts a 15 per cent fall in the S&P 500 early in 2014 before a “big sleep” which will see a few years of flat markets. Liquidity injections have been the “main driver” of US equities since 2008, says SocGen, noting S&P 500 declines of 16 per cent and 17 per cent after the end of the first two phases of quantitative easing.

Earnings momentum is “negative” and “decreasing” – a problem when the US is, along with Switzerland, the most expensive market in the world.

Excluding the financial sector, the US market now trades at 3.2 times book value. Over the past 30 years, says SocGen, the only period non-financial US stocks traded higher was during the dot-com bubble (1997-2001).

SocGen recommends switching out of the “tired and crowded” US trade and into euro zone and Japanese equities, “where economic policy is much clearer, monetary policy very loose and positioning is low”.

Big switch underway
That switch may already have begun. US gains have been modest since June but the Euro Stoxx 50 is up 16 per cent. Like SocGen, Barclays reckons the rally has further to go.

The MSCI Europe ex UK Index is up over 50 per cent over the past two years, despite earnings haven fallen. Forward earnings have risen from nine times estimates to 12 times – a “sharp re-rating”. Although not expensive, Barclays admits there is “a lot less headroom” for sentiment to improve, and investors may now need to see “meaningful earnings growth”.

They will get it, with Barclays forecasting double-digit earnings growth in both 2014 and 2015. That may seem optimistic, but such growth rates “are not particularly rare, especially in recovery periods and with bank write-downs falling”. Even then, earnings would be well below their 2007 peak.

US taper talk and European signs of economic stabilisation have triggered recent outperformance, showing not much is needed to beat “still-muted expectations”.

Fear hits a new high but falls won’t hit bull market
THE Dow Jones Industrial Average last week touched its 200-day moving average for the first time in 2013. Fear, as measured by the Volatility Index (Vix), hit its second-highest level of the year, with trading volumes in Vix futures hitting their fourth-highest on record.

However, the fear is skin deep. For some time now, Vix spikes have quickly reverted back to low levels, and investors are betting that trend will continue. Most trading was in November put options with a strike price of 14, indicating traders expect the Vix to quickly fall from last week’s highs (21).

Clearly, the assumption is that recent falls are a mere speed-bump in the ongoing bull market, not the beginning of the end.

Has Apple lost its mojo?
THE next Apple iPad and iPad mini are expected to be announced soon. Will the stock bounce? If not, is it more proof that CEO Tim Cook doesn’t have Steve Jobs’ Midas touch? The New York Times recently contrasted Apple’s 10 per cent fall following last month’s unveiling of new iPhones with Jobs’ tenure, when product announcements used “routinely send its stock soaring”. As Apple blogger John Gruber notes, however, Apple has typically fallen following product announcements, going back to the introduction of the original iPod in 2001. The launch of the original iPad in 2010, too, was followed by share price falls.

If Apple shares fall in the wake of the latest iPad upgrade, many will say the company has lost its mojo and is lost without Jobs. That may be so, but it would be unwise to over-interpret share price action, given the less prosaic reality – traders like to buy the rumour and sell the news.

A by any other names would smell as sweet
THERE was a flurry of Twitter mania in the stock market recently, even though the company has not gone public.

Shares in Tweeter Home Entertainment Group soared by over 2,000 per cent, despite the company – now a penny stock – having gone bankrupt in 2007. More than 14 million shares changed hands before regulators halted trading.

Social media hype is tame compared to dotcom madness in the late 1990s, however. Then, one penny stock soared by 142,757 per cent in two days after being mistaken for a hot tech firm. A study, entitled A by any other name, found firms that added “.com” to their names an average jumped 74 per cent over the next 10 days. The bounce was similar across all companies, regardless of their level of involvement with the internet.

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