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Recent market volatility continues to show all the hallmarks of a bull market correction, not the beginnings of a bear market, says Fisher Wealth Management in its latest Markets Commentary.
Sometimes market corrections experience only one down spike before rebounding, yet at other times a partial recovery may be followed by a second down leg, according to Fisher. Either way, says Fisher, corrections tend to be short lived and, since 1969, not one of the MSCI World corrections has lasted more than four months from peak to trough.
Commenting, Andrew Teufel, Director of Research, said, "In the current investment climate, there are plenty of excuses for people to be nervous about equities. However, we do not see anything at this time that causes us to alter our bullish stance. First, we believe that central banks across the globe have reached an appropriate balance in their monetary policies - not overly tight, leading to global recession, or overly loose, stoking inflation. Lending activity also appears healthy, suggesting there is ample liquidity in the credit markets and, at the same time, we do not anticipate significant inflation pressures building."
Andrew Teufel concludes: "Moving forward, global markets should be driven by a number of factors. Despite recent rises in short-term interest rates in the UK and Europe, long-term rates remain benign. This will have a bullish impact on relative valuations as well as supporting the wave of M&A activity we are continuing to experience. At the same time, the global yield curve is still sufficiently steep, economic growth continues to exceed expectations and corporate earnings remain stronger than even increased expectations in most developed markets."
Equity valuations remain cheap
Fisher has regularly stated over the last several years that shares around the world are very attractive relative to fixed interest alternatives. In fact, if anything, equities are undervalued to a greater degree today than at any other time since the bottom of the bear market in March 2003 according to Fisher. Every major market continues to show a significant positive gap between equity earnings yield (E/P) and respective government fixed interest yields.
Forward Earnings Yield vs 10 Year Government Bond Yields
| |
US |
UK |
Japan |
Germany |
France |
| Forward Earnings Yield |
6.97% |
8.45% |
5.92% |
8.47% |
8.76% |
| 10 Year Government Bond Yield |
5.14% |
4.71% |
1.93% |
4.07% |
4.08% |
| Yield Spread |
1.83% |
3.74% |
3.99% |
4.40% |
4.68% |
Sources: Thomson One Analytics, Bloomberg; As at 30/6/2006
Historically*, the spread between earnings yields and fixed interest yields has been narrower than is currently the case. For these factors to return to parity, the markets must either increase by a considerable amount, long-term bond yields must rise, earnings must fall, or a combination of all three must occur. Fisher's research shows this condition exists in most developed markets and provides a bullish framework for global equities.
How the Market Can Get to Parity
FTSE 100 Level ................................................... 5833
FTSE 100 Expected EPS 2006 at 20/7/2006 .............. £492.7
FTSE 100 Earnings Yield ........................................ 8.5%
10-Year UK Gilt Yield ............................................ 4.7%
To reach parity, either:
Stocks could rise ................................................ 79.3%
Or Bonds yields could rise ..................................... 3.7%
Or earnings could fall .......................................... -44.2%
Or a combination of all three
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Sources: Thomson One Analytics, Bloomberg; As at 30/6/2006
To view the latest Fisher Markets Commentary in its entirety, please visit www.fisherwm.co.uk.
*The current UK yield spread is at its highest level since 1989 according to Thomson earnings data and Bloomberg gilt data. During this period, the average spread between the FTSE 100 and the 10-year gilt is 0.08% using monthly data.
For further information please contact:
Miles Standish
Managing Director
Fisher Wealth Management
020 7318 7183 |
Hugo Mortimer-Harvey/Sally Wright
quill communications
020 7758 2234
020 7758 2238 |
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