Risk On? Maybe Not For Much Longer
(February 4, 2013) — A lack of positive data from the United States and other large economies could see the recent equities bull run hit a brick wall, analysts at Societe Generale said today.
The French bank’s team said US equity rally had been impressive – the S&P500 rose 5.4% in January – given the slow pace of the economic recovery.
Some market commentators had been predicting – and even announcing – the “Great Rotation” of investor sentiment over the last few months. A surge towards equities in the first weeks of the year helped to propagate the idea as equity markets rose on the inflows.
However, the note said: “Fourth quarter GDP contracted by an annualised 0.1% [quarter-on-quarter], while sales forecasts remain weak and earnings growth has slowed down since summer 2011. With the lack of positive economic data, the S&P500 looks overvalued and therefore the ‘risk on mode’ could come to an end in the near term.”
The analyst note said the risk of a Chinese “hard landing” had dissipated, which was helping to fuel confidence in equity markets. But at the start of the second quarter investors should be ready for the nation’s recovery to slow and impact markets more generally, the note said.
More positively, Jim Reid, global markets strategist at Deutsche Bank, said the encouraging start to February had been boosted by other economic signs in the US.
“US equities began the month of February on the front foot as the Dow Jones (+1.1%) closed above 14,000 for the first time since 2007 and the S&P 500 (+1.0%) forged new post-financial crisis highs,” Reid said.
This was due to positive news on non-farm payroll numbers, he said, but added that more generally unemployment had edged up to take the sheen off the day’s achievements.
Both banks’ analysts were relatively positive on the movement of the Eurozone, though Reid highlighted potential political issues in some of the countries that were struggling with their debt burdens.
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