Market Analysis: Equity Investors Feeling Hot Yet?
Or dancing on the edge of the volcano as one strategist puts it…
After a solid bull run in the last nine months, the snowballing debt crisis that is gripping most developed economies signals the time for a strategy change. Tim Bond, strategist at Barclays Capital has this outlook for equities…
“Fiscal dynamics point towards higher government bond yields in many economies, including the UK and US. History is unequivocal in linking fiscal deterioration to higher yields. This point is clearly becoming recognized by investors. As a result, a contagious process has started, during which risk premia in bonds, equities and currencies adjust higher to reflect the fiscal situation. This process is unlikely to remain confined to southern Europe, but will eventually embrace all those economies with sizeable budget deficits.”
…
Giving him three reasons to be pessimistic:
1) The majority of the G20 is a fiscal mess
2) Demographic trends of the G20 are highly negative
3) Containing the long-term government debt problem will be painful
Accordingly…
“The analysis also reinforces our standing recommendation to ratchet down equity risk in the current quarter, in expectation of corrective behavior in Q2 and Q3. The timeline we had in mind is being accelerated and a contagious process is already underway. To be sure, such an approach might be overly cautious and premature. There is an obvious risk of missing out on further gains from the liquidity fueled portion of the bull run. Some investors will undoubtedly wish to continue dancing on the edge of the volcano and we wish them good luck.”
