Market research from Internaxx October 2009

This section is brought to you by the Luxembourg based online broker Internaxx. Market analysis is provided by Fortis Investments, the asset management arm of the BNP Paribas Fortis Investments group.

 
Gold rush overdone
Source: Fortis Investments

Commodity prices moved higher, with most attention going to gold, which passed the USD1,000 per ounce mark. It may be benefitting from inflation fears and a loss of investor confidence in a paper currency system which is not backed by a real asset such as gold. However, since other commodities have been more stable, we view this rise as overdone. We are underweight gold in our absolute return portfolio.

Equity markets ground to post-crisis highs. The coming company earnings season may hold some upside surprises from top-line sales instead of cost cutting, which could support equities. Bond yields held at the lower end of their trading range as retail investors move out of cash, which offers hardly any return, and according to US fund flow data mostly into Treasuries. This would signal persistent caution. The inflows absorbed the record issuance of Treasury paper. We expect yields to stay low, but are neutral duration since yields are at the bottom of their trading range.

The 2.7% mom rise in US retail sales in August was the strongest since October 2001, just like then supported by car sales. The US government cash-for-clunkers programme was clearly visible in the data. Excluding cars and petrol, sales rose by a modest 0.6%, still the first meaningful increase since February. Consumer confidence rose in September after two months of falls, but has yet to trend up in the wake of the stabilising housing market and the equities rally. The labour market is still a headwind. Initial jobless claims have been sticky. We do not foresee strong consumption ahead.

The manufacturing sector should be more supportive of US growth. Purchasing managers have signalled that inventories are undesirably low, while domestic and export orders are strong. Still, trade will likely subtract from growth in the current quarter since many cars sold under the cash-for-clunkers drive were imported.
We expect a muted recovery in the eurozone. The declines in industrial production have become much less severe and purchasing managers’ surveys point to an improvement. While unit labour costs have surged, we do not expect this to translate into higher inflation. The economy is simply too weak. Since the eurozone is not plagued by the low savings rate and high debts dogging US consumers, we expect consumption to recover before the labour market does.

Japanese GDP growth for the second quarter was revised from 3.7% qoq annualised to 2.3%. Inventories were run down by more that previously estimated, which sets the stage for a stronger rebound in the third and the fourth quarter. However, the unemployment rate is at a record and incomes are falling. In July, machine orders dropped by 9.3% after June’s 9.7% surge. This does not point to an imminent recovery in investment spending.

The picture in China is much brighter. August data showed the economy returned to strong growth. Retail sales increased by 15.4% yoy, fixed asset investment by 33.0% and industrial production by 12.3%. Most rates are below those seen before the global financial crisis, but this is actually healthy. It prevents the economy from overheating. Inflation data show overheating is not a threat for now: consumer and producer prices are falling.


Equities score on many points
Source: Fortis Investments

Our scorecard for equities has improved steadily in recent months as the assessment for the economic cycle moved from negative to positive. At least in the near term, the global economy looks set to grow strongly, while inflation is nowhere to be seen. Asia is recovering strongly and the US could see surprisingly strong growth. Europe and Japan should be swept up in this rising tide. There is liquidity support and the profit outlook and analysts’ earnings expectations have improved. Despite the market rally since early March, we assess valuations as neutral. Price-earnings ratios have risen to above their long-term averages, but P/E expansion is normal in the initial stages of an economic recovery.
Improvements in company earnings and in money market and credit spreads as well as the recent increase in mergers and acquisitions should support markets further. All these factors have encouraged us to go overweight in equities. We bought equities in the US, Europe and Japan. In our regional allocation, we prefer emerging markets, followed by Japan and Europe, remaining underweight in US equities.

We took further profit on our overweight position in investment-grade credit, remaining overweight though. Overall, we are overweight in risky assets, but we have diversified our exposure. Since equities are more liquid than corporate bonds, we have enhanced the liquidity and therefore the flexibility of our overall portfolio.

Recent data were slightly disappointing. The US economy shed a lower-than-expected 216,000 jobs in August, but the numbers for June and July were trimmed, for the first downward revision since April. The jobless rate jumped from 9.4% to 9.7%. There are no signs consumers will start spending more. In the context of a rising jobless rate, massive losses in home values and efforts to rebuild savings, consumer credit fell by a record USD21.5 billion in July. Thus, we expect the US economic recovery to disappoint ultimately. But this is too far away for markets to impede short-term gains.

The final eurozone composite PMI number for August came in at 50.4, pointing to a growing economy. Although growth could be robust in the near term, we do not expect it to be particularly strong given the domestic impediments. In Japan, the economy watchers’ survey, which had surged strongly in recent months, unexpectedly retreated, but the leading index and exports rose further. More and more PMIs in emerging markets are signalling recovery or even outright growth: Brazil’s rose to above 50, while Singapore’s surged to the highest in 2½ years.

There is further support for our view that US short-term interest rates will stay exceptionally low. The FOMC panel expects the recovery to be muted and inflation subdued, seeing no need to change rates. It looks increasingly likely to us that the Federal Reserve will err on the late side in raising rates. Leaving eurozone rates unchanged, the ECB issued conservative economic projections. Even if growth would surprise to the upside, ample slack in the economy should keep inflation low here too. Thus, the ECB will not raise rates soon either.
 
 
Internaxx Top Ten Buy and Sell - International Investors Activity Summary from Internaxx
 
The Top Ten Buy and Sell are measured as the total number of trades carried out in each stock by Internaxx clients over the previous month. This report is not a recommendation to buy or sell these stocks.
 
Top 10 September 2009
 
Top 10 Buy

1. Citigroup
2. AIG
3. ArcelorMittal
4. Fortis
5. Lloyds Banking
6. Royal Bank of Scotland
7. Fannie Mae
8. Bank of America
9. Natixis
10. Rio Tinto
 
Top 10 Sell

1. Citigroup
2. AIG
3. Lloyds Banking
4. Fortis
5. Bank of America
6. ArcelorMittal
7. Fannie Mae
8. Freddie Mac
9. Rio Tinto
10. Natixis


DISCLAIMER
This document has been prepared solely for informational purposes and is not an offer, or a solicitation of an offer, to buy or sell any security or financial instrument, or any investment advice. Prospective investors should conduct such investigations as deemed necessary and should seek their own legal, accounting and tax advice to determine independently the suitability and consequences of an investment.