Time to play a rebound in equity markets

Thierry Crovetto (pictured), independent fund analyst at TC Stratégie Financière, thinks a rebound is to be played in equity markets.

Early this year, particularly difficult markets and the downward acceleration of recent weeks have canceled more than a year of performance including the benefits of the ECB’s quantitative easing on equity markets.

This continuous decline since December 2015 was initially “driven” by the drop of oil and raw materials. The weakness in this sector subsequently contaminated the financial system. This is mainly explained by fears of bank
exposure to companies related to energy and raw materials.

These tensions are visible on the credit market with a significant widening of spreads.

Here is why we think it is time to play a rebound in equity markets…

1/ Valuation

The market downturn has made valuation levels more attractive (especially in Europe) in absolute and in relative terms compared to bonds which are still globally speaking, expensive.

The dividend ratio of shares / yields on government bonds (25% worldwide and 40% in the eurozone have a negative rate) has never been higher.

2/ Correlation

The recent equity decline was strongly correlated to falling oil prices. We expect the latter to stabilise or to rebound under the coordinated action of producing countries (OPEC and non- OPEC), whose situation has become worrying.

This will stop the sale of financial assets by these troubled producing countries.

3/ Maroeconomics

The continuation of the recent fall in equity markets could be justified by a systemic shock (such as the bankruptcy of Lehman Brothers in 2008) or by a recession.

However, global economic growth continues to gain force (improving leading indicators), and the dynamics of emerging markets is improving.

4/ Central banks are still maneuvering

Aware of their past mistakes, central banks remain present. The Fed ends its quantitative easing and is carefully raising rates (without reducing its balance sheet for now), but the monetary stimulus continues elsewhere (particularly the ECB and BoJ).

5/ Investor pessimism

Very few investors are optimistic about the evolution of the equity markets in the United States … The current level is comparable to that of March 2009 for example!

6/ Technical analysis

The decline of the recent days looks like a capitulation, with a 61.8% retracement of the upward movement since 2011, and indicators clearly oversold following a drop of nearly 30% since April 2015!

Rebounds towards 3000 and subsequently, 3300/3400 are expected… However this rebound will not happen without financial securities.

In this context, we maintain our strategies risk levels unchanged at a moderate level.

Furthermore, the current level of volatility allows us to grasp Put sales opportunities far out of the money (2 400 points on the Eurostoxx 50). The collected premiums, largely finance hedge purchases that we currently hold.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco.
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