Economic indicators, moderate global growth and improving investor risk appetite suggest investors should be buying stocks says investment firm BIAS.
According to BIAS Chief Investment Officer Robert Pires global economic indicators are stabilising or improving. Speaking at the BIAS Quarterly Market Briefing at the Westin Casuarina Resort in February, Pires said the economy was growing in aggregate terms both in developing and emerging countries.
Global gross domestic product is expected to reach $69.9 trillion in 2013 up from a 2011 GDP of $65.4 trillion.
Although GDP growth rates are declining in the developed and developing world, the global GDP growth rate was 3.8 per cent in 2011 and is forecast to be around 3 per cent in 2012 and 2013, Pires said, who added that this was a positive sign.
Markets are improving
Following a disappointing third quarter the final quarter of 2011 was very positive, he said, as all asset classes, except gold, were up in the final quarter of 2011.
Market performance was mainly driven by US equities, while developing markets performed more modestly.
The S&P 500 was up 11.8 per cent compared to the MSCI Emerging Markets Index increase of 4.1 per cent.
Pires noted that BIAS had made a lot of money from emerging markets but in the second half of 2011 felt that they were “full value”.
He says the current markets also show that the US maintains the responsibility of leading the world economy out of recession, rather than Europe, Japan or China being able to take on that role.
As far as gold is concerned Pires said, that more recently BIAS has been suspicious of gold, because it costs money to hold it, it does not generate any income and prices are very volatile. In the last quarter gold fell 3.7 per cent.
BIAS noted that a number of economic indicators point to rising stock prices. Generally equity markets lead the economy; in other words economic performance generally follows the performance of the stock market.
Given that economies are in or coming out of a recession the next move is likely to go up, Pires said.
An aggregation by the OECD of leading economic indicators from the US, Canada, Brazil, China, Japan, the UK and the euro area shows that the index bottomed out in April 2009, flattened in 2010, then dropped slightly and has stabilised since then, Pires said.
JP Morgan’s Global Composite Purchasing Managers Index is also rising, suggesting economic expansion.
“We have been in a fairly expansive mode since 2009 and this turned down in 2011. But at the end of 2011 the manufacturing and the composite purchasing manager index have turned up,” Pires said, signalling economic confidence.
He further highlighted a quantitative study by Credit Suisse First Boston measuring global risk appetite.
The hypothesis of the study is that when investors become too optimistic or euphoric, one should reduce one’s own equity weighting and correspondingly buy when other investors are too pessimistic.
Currently the GRA in this study is turning up from a five year low in the “panic zone”.
Historically stock markets saw a rapid recovery after “panic” episodes in the GRA index in 2002 and 2008.
Meanwhile the Fed Model, which compares the yield on S&P 500 stocks to the ten-year US Treasury bond yields, suggests equities still look cheaper than bonds. This means the opportunities from stocks are much higher now than those from bonds, Pires says.
The reasons to buy stocks therefore include the positive global economic growth, improving investor risk appetite, comparatively cheap stocks compared to bonds, dividend yields on stock exceeding yields on bonds and the fact that corporations are flush with cash.
“You can see from our comments that we are not really doomsayers, we are quite optimistic about the markets,” Pires concluded.
Dan Rivera, senior investment strategist for BIAS, outlined the relationship between economic cycles and stock market performance.
He said it was BIAS’ view that equities, which lead economic recoveries, are at the beginning of the middle phase of a bull recovery.
He explained in different stages of the economic cycle, certain sectors benefit more than others, and it thus makes sense to rotate a portfolio from a profit potential and risk control perspective around different industries.
At this particular point BIAS favours the technology, industrials, materials and telecom sectors. Telecom in particular provided an additional benefit of paying strong dividend yields, Rivera added.
BIAS remains underweight in financials, staples and healthcare. However, strategy is to lower the underweightings in both financials and staples to be better positioned when the market turns, he said.