Psigma’s Thomas Becket answers 20 questions about the markets

Thomas Becket, chief investment officer at Psigma, has listed and answered 20 questions about the markets and risks such as the US fiscal cliff.

1. Are We Concerned by the Recent Equity Market Falls?

Without wanting to sound blasé about the recent pullback in equity markets, we had been expecting a period of consolidation and correction, so the recent falls are not a great surprise. Equity markets had moved too far, too quickly and the rally that was triggered by ECB Chief Mario Draghi’s summer commitment to solve the peripheral debt issues was over-extended. It seemed only a matter of time before investors started to worry about the US fiscal cliff, refocus on Europe’s issues and become more balanced in their mindset, having probably been too optimistic in the short-term. A mediocre corporate reporting season also provided an excuse for investors to reassess their equity allocations.

Our central view is that after a cathartic cooling in equity market sentiment, the stage is set for an end of year “Santa Rally”, as long as there is not a further deterioration in the US and European political scenarios. Indeed a solution to the US fiscal cliff and more help for Greece should soothe investors’ nerves. Interestingly, equity markets are now lower than they were when the latest quantitative easing (QE) announcement was made by the US Federal Reserve in September.

2. So we’re Bullish on Equities?

We would say that we were “sensibly realistic”, rather than “overly-bullish”. Finding value across global financial markets is becoming very challenging, as evidenced by a period of uncharacteristically low idea generation at Psigma. However, the obvious value in core financial markets resides in equity markets, particularly from a dividend and earnings yield perspective. There are some pockets of extreme value, such as Japan, China and Europe, which we are taking advantage of within our portfolios. We don’t believe in “toxic assets” but we do believe in paying “toxic prices” as is the case in these hated markets. The US looks much more fully valued to us, but we still expect a decent year for US equities in 2013.

Another key reason for admiring the qualities of equities is the recognition that Central Bankers will do all they can through QE to reduce risk premiums across asset markets. The most attractive risk premiums that we can find are in equity markets, which partly lead us to form our cautiously constructive view. Equities certainly now look cheap when juxtaposed with other asset classes, particularly corporate credit and government bonds.

3. What Do We Expect from Corporate Earnings in 2013?

Predicting corporate profitability in 2013 is tricky, but we do expect companies to be able to grow profits, in correlation with improved global economic expansion. Analysts had originally expected earnings growth in double digit percentages next year, but they have recently scaled back their forecasts to a more sensible level. We would expect corporate profits to grow in high single digit percentages and allied to fair valuations it should allow a decent year for equities in 2013. Those profit gains will have to come from top-line sales and revenue growth, given the fact that profit margins are already at exceptionally wide levels.

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