Equities Roundup: Bearishness Abounds
The risk of European contagion infecting the economies of China and the United States, and the resulting impact on corporate profits, has taken center stage for equity investors over the past month. And while markets have rebounded from their recent lows, the mood remains jittery.
Death of Equities Redux
- In “Markets: Out of Stock,” the Financial Times seems to accurately capture the gloomy mood of global equity investors, though the author’s suggestion that we are at “the end of a six-decade passion for equities” calls to mind the ill-timed BusinessWeek cover story, “The Death of Equities.”
No Guts, No Glory
- In “Institutionalizing Courage,” from the latest newsletter from Research Affiliates, Rob Arnott advocates for a systematic practice of “rebalancing into the most feared and loathed stocks, and out of the most beloved high-fliers.” Superior long-term performance, he argues, will be the reward for those disciplined enough to stick to such a strategy. Perhaps not surprisingly, Arnott recently described European and Japanese equities as “mildly interesting,”given their recent decline in prices — a rather lukewarm endorsement that, nevertheless, likely caught the attention of value investors.
- As Japanese stocks recently hit 28-year lows, AllianceBernstein described the selling as “indiscriminate,”and pointed to a rebounding economy, strong corporate balance sheets, and compelling valuations as reasons for optimism.
- Warren Buffett famously said that when it comes to buying stocks, “Be fearful when others are greedy, and be greedy when others are fearful.” And at least one intrepid fund manager sees such an opportunity in the shares of European banks.
Gloom, Doom and (Eventually) Boom
- For the bullishly inclined, John Hussman’s weekly market commentary usually serves as a cold dose of pessimism. In “The Heart of the Matter,” Hussman pulls no punches, taking aim at a “warped” global financial system, characterized by “financial sector deregulation coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice including bailouts and opaque accounting.”
- In a recent interview, market pundit John Mauldin spoke of the debt crisis and related problems facing Europe and the United States, predicting that a bull market is “only a recession away.”
- Long-time bear David Rosenberg recently made headlines when he suggested that a confluence of events, including the possibility of an end to gridlock in Washington, could cause him to turn bullish on stocks.
Flight to Safety
- Fans of GMO’s Jeremy Grantham know that he has been a leading advocate of holding high quality stocks, and his firm’s latest white paper, “Profits for the Long Run: Affirming the Case for Quality,” points to corporate profitability as the most reliable indicator of quality. Asserting that profitability is the ultimate source of investment returns, the authors argue that superior profitability persists and can be forecast. And yet, other than in times of financial crisis, investors routinely undervalue quality stocks.
- In the case of emerging markets, however, AllianceBernstein wonders if the safety trade has gone too far, pointing out that “the pricing gap between high- and low-beta stocks is wider than it’s ever been.” The firm notes that it sees little difference in the balance sheet quality of high-beta versus low-beta companies.
Investing in China Just Got Riskier
- On the heels of reports that China has ordered the Big Four accounting firms to eventually have only Chinese citizens leading their local offices, as well as growing evidence of a real estate bubble and concerns about a hard economic landing, came news that Beijing has begun withholding financial reports and other financial data from investors. While financial information coming out of China had already been treated with skepticism by investors, it seems unreliable data is preferable to no data at all. U.S. fund managers apparently are undeterred and increasing their exposure to Chinese stocks.
The Art and Science of Value Investing
- Noted valuation authority Aswath Damodaran’s blog, Musings on the Markets, presents an excellent series on value investing based on his recent paper, titled “Value Investing: Investing for Grown Ups?” Damodaran offers his insights on passive value investing, including screening, contrarian investing, and activist investing.
For more news and trends, visit the Equity Investments Community of Practice.