Stocktake: Global investors are reluctant bulls

The latest Merrill Lynch monthly fund manager survey shows concerned investors are taking the Tina approach – there is no alternative – to stocks.

In February, just 2 per cent of investors believed equity bubbles were the biggest risk facing stocks, compared to 13 per cent today.

A net 25 per cent believe global equities are overpriced, the highest level since 2000. Although European and Japanese markets have been on fire lately, the US remains the focus of concern, a net 68 per cent saying it is the most overvalued region.

However, a record 84 per cent say bonds are overvalued, and cash is yielding nothing, so investors remain in risk-on mode.

Europe continues to be the market favourite, a net 37 per cent saying it is the region they most want to overweight.

For now, that remains the key point.

Media coverage of the Merrill survey has focused on bubble fears, but investors seemingly feel the US is the only obviously overvalued region. Europe is no longer cheap, but nor is it bubbly. That, combined with the Tina sentiment, means buying the European dips remains the obvious trade. Don't take Tina to extremes Behind the aforementioned 'Tina' approach is the notion investors must put their money somewhere, and lousy bond yields give them little choice but to buy equities.

However, while the paucity of alternatives undoubtedly boosts demand for stocks, it cannot support indices indefinitely.

Money manager and blogger Ben Carlson notes US bond yields remained below 3 per cent for 19 consecutive years between 1934 and 1953.

Sure enough, it was a good environment for equities – stocks gained more than 600 per cent, or 10.9 per cent annually. However, it was a bumpy ride: investors suffered five bear markets, losses ranging from 24 to 54 per cent.

Take another example: Japan, where bond yields have been below 3 per cent since 1997.

Stocks have since both swooned and soared, but ultimately have gone nowhere.

“Just because interest rates are low doesn’t mean stocks can’t or won’t fall,” notes Carlson.

Low yields are important, but so are other countless other factors; the Tina argument shouldn't be taken to extremes. Momentum bodes well Still, momentum should continue to trump valuation concerns for now, suggests Nautilus Research.

The MSCI All Country World Index, which contains stocks from 46 countries, broke out to a new one-year high last week.

Since 1987, says Nautilus, there have been 20 instances where the index hit its first one-year high in more than three months.

On 16 occasions, global stocks were higher three months later, with gains almost twice average levels.

Six months later, stocks gained on 17 occasions, rising an average of 5.65 per cent – again, almost twice as high as the average six-month gain.

Global participation is broadening, with more than 25 per cent of indices at one-year highs.

In past instances, similar readings were followed by stock gains on 14 of 15 occasions, with three-month gains almost twice as high as usual.

Global stocks may be overvalued, as the Merrill respondents fear, but it looks like they are going higher.

Celebrating poor earnings US earnings look set to be lacklustre, we noted recently, but this didn't mean stocks must fall.

That turns out to have been an understatement.

Bespoke Investment Group examined past quarters where analysts were busy cutting estimates in the lead-up to earnings season.

On average, stocks gained 2.4 per cent during earnings season, gaining 80 per cent of the time.

When analysts were raising estimates prior to earnings season, stocks went on to decline 1.2 per cent, gaining on just 40 per cent of occasions.

Recent analyst revisions have been especially ugly. Since 2009, only three other quarters were as bad.

Each time, the S&P 500 gained between 4 and 5.5 per cent.

The biggest revisions lately have occurred in the industrial sector, made up of large multinationals hit by the strong dollar.

Again, only three other quarters since 2009 have been as poor; each time, the sector gained between 5 and 9 per cent during earnings season.

‘Good’ or ‘bad’ news does not move markets; surprises do.

If something’s in the news, it’s in the price.

Taking promises with pinch of salt Brokerage adverts tend to be dry affairs, so kudos to the recent effort from discount operator Interactive Brokers.

“Here’s some info on the proprietary fund I recommended,” a broker tells his potential client, before handing him a giant block of salt.

“When you’re considering my advice, remember that I get paid based on how well I sell our bank’s expensive trading products,” he adds.

“And we sell your orders to whoever pays me the highest kickback.”

That should be illegal, the stunned investor responds.

“Yeah . . . probably!” says the smiling broker.

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