flash Markets
june 2009
Markets rebound: What to think about it? Dominique Sabassier, Chief Investment Officer
Led by the financial sector, equities in Europe and the US have risen sharply since March 9 this year. The basis for a new bull market?
n Since March 9, we have seen a spectacular rebound in equity prices. What are the main reasons behind this? Technical factors? An economic outlook that despite everything is starting to brighten? A number of factors have contributed to the rebound we have seen in the equity markets. Firstly, investors have gradually set aside the fear of systemic risk that was prevalent from September 2008 to February 2009. On top of that, most macroeconomic indicators point to the fact that the situation has stopped deteriorating. The G20 meeting held in London in April also played a critical role: for the first time in history, we saw the putting together of a global response to what is also a global crisis. Along the same lines, mention should also be made of a radical change in how central banks communicate. Overall, they have proven to be much more responsive than in the past and they did not hesitate to adopt nontraditional measures. All of these factors combined with the fact that equity markets had fared particularly badly, driving valuations down to extremely low levels. n Are investors slowing getting back their appetite for risky assets? While some uncertainties have undoubtedly been cleared up, the outlook is not necessary safe. Investors, and in particular institutionals, took on board the fact that short-term products were no longer capable of offering sufficiently attractive returns. We're thus now seeing portfolios being switched over to assets offering slightly higher risk, such as corporate bonds early in the year or equities over the past number of weeks.
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flash marKETS
n Monetary assets are estimated to account for 47% worldwide compared to 24% normally. Does that mean that this equity rebound might continue? The rebound seen since March 9 could give rise to three possible scenarios: • Firstly, we'll see a return of the bull market, with the CAC 40 rising sharply to over 4500; •S econdly, it is a technical rebound enabling part of the losses suffered towards the end of 2008 and the first two months of 2009 to be made good; •L astly, third scenario, it is only a temporary rebound, admittedly substantial, but we are still in a bear market. We think the first scenario should be ruled out given that the economic climate is still weighed down by a number of uncertainties. We should still expect profit warnings, anticipate a rise in corporate income tax and a new distribution of added value between shareholders and employees. The second scenario seems more likely but once again it can't be assumed that we have a handle on all the possible effects of this unusually strong crisis. The problem of the massive transfer of debt to states and renewed economic nationalization remains. Given this situation, we feel that this rebound will be limited with a CAC 40 target of 3500/3600 over the coming 6 months. More specifically, we expect pretty limited upside potential for equities in a climate marked by a continued high level of volatility. n Should individual investors gradually increase their risky assets allocation, in particular equities? Equity levels remain attractive over the long-term even if we feel that it would be premature and overly risky to overweight equities. On the other hand, with the risk-free rate offering very low returns, it would in fact be a good idea to progressively move into assets offering greater potential returns for a higher level of risk. When you look at the current importance of certain economies such as China or India and the fact that we already expect the US to come out of the economic crisis before Europe, one might be tempted to take a gamble either on these markets or on European equities likely to benefit from this. In any event, and even if individual investors remain very cautious, leaving room for equities in a portfolio or a life insurance contract currently looks like a sound move.
Written on 06/10/2009 Dominique Sabassier has been interviewed by the BFBP Source : www.gestionprivee.banquepopulaire.fr
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