The UK and US equity markets remain oversold despite a rally reducing the extent of the conditions, ...
The UK and US equity markets remain oversold despite a rally reducing the extent of the conditions, says Mike Lenhoff, chief portfolio strategist at Gerrard.
He believes they will either continue to rebound or their respective oversold conditions will be resolved by a consolidation phase in which they move broadly sideways. He says: 'At this stage, it is not unreasonable to expect a further rebound. For the UK, a rally to above 5000 on the FTSE 100 is a realistic expectation.'
Lenhoff adds that the US recession will be evident and the corporate newsflow will continue to be poor. 'Any analyst reluctant to reduce earnings estimates will have little choice but to cut their numbers in the coming months,' he says. 'Despite this, the UK markets are discounting plenty of bad news.'
The US equity market is discounting a decline in earnings of around 8.5% over the next year, which implies that the 12-month consensus forward earnings expectations will be reduced by 17%.
Lenhoff says: 'This is a considerable downgrading even allowing for recent developments. For the UK, the FTSE 100 is discounting a collapse in earnings by 20% over the next year. This indicates analysts will have to cut earnings forecasts for the FTSE 100 by more than 25%.'
Richard Burns, chief investment officer at Baillie Gifford, adds that the UK and US markets have fallen by a third from the peak levels achieved in 2000. He says: 'European markets have done slightly worse. Although economic prospects are clearly poorer than they were at the start of the year, particularly in view of the blow to confidence resulting from the terrorist attacks in America, some good value is beginning to appear. This is particularly true in the UK, where a good number of shares are offering yields comparable to those available on gilts.'
The UK equity market is not only oversold and undervalued, Lenhoff says, but will still be undervalued even if it rallies to beyond the 5000 mark and then stalls. 'This is provided that gilt yields remain as they are,' he adds, 'which should be helped by the slowdown in GDP growth, combined with the tame outlook for inflation.'
The drive to deal with terrorism is a risk and induces a philosophical shift towards increased government spending on security and defence, says Lenhoff. He adds that this stimulates demand, transforms budget surpluses into deficits and gives way to a secular period of accelerating inflation.
'Another risk is that the bursting of the tech, media and telecom bubble has yet to work its effect through the major economies and induces a secular period of deflation in which there is constant disappointment in earnings expectations,' he says. 'At this stage, the odds favour more of what the western world has been used to over the past few decades, namely a secular trend of disinflation and/or low and stable inflation. With that prospect in mind, the bottom line would appear to be that the peak to trough fall in the FTSE 100 index of 35% had been overdone and that the current level is fundamentally unjustified.'
Burns says: 'On balance, we hold the view that this is a normal economic cycle, although the downward part may last a considerable time yet, despite the tragedy and its potential impact on consumer confidence and investor risk tolerance.'
Further rebound in FTSE 100.
European markets hit worse than UK and US.
Yields comparable to gilts in the US.
Corporate newsflow poor.
FTSE 100 earnings cut by 25%.
TMT still to work thorugh economies.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation