Strategists from the Goldman Sachs Group to AMP Capital Investors and JPMorgan Chase are telling clients to hang on after losses that began with currencies in Turkey and Argentina spread to developed markets.
Panic is making an enemy of telephones for Catherine Yeung, the director for equities at Fidelity Investment Management Ltd. in Hong Kong.
“My children hate that BlackBerry,” said Ms. Yeung, whose clients have been calling amid two weeks of declines that erased $3 trillion from global stocks. She's advising calm, noting that profits are rising and shares just got a lot less expensive.
“Being a contrarian and getting in when things seem bad is often a good thing,” she said. “The companies we are looking into can still deliver attractive margins. Things are getting cheap.”
Strategists from the Goldman Sachs Group Inc. to AMP Capital Investors and JPMorgan Chase & Co. are also telling clients to hang on after losses that began with currencies in Turkey and Argentina spread to developed markets. The S&P 500 slid 2.3% Monday, capping its first 5% retreat in eight months, while Japan's Topix index plunged 4.8% for its biggest decrease since June.
“We didn't expect the U.S. would be this weak,” Kathy Matsui, chief Japan strategist for Goldman Sachs in Tokyo, wrote in an e-mail. “Since we do not see sufficient reason to change our fundamental earnings outlook and stock prices have fallen, the market still appears attractive to us.”
The American equity gauge rose from a three-month low Tuesday, adding 0.9% to 1,757.17.
STRATEGIST FORECASTS
Ms. Matsui's 12-month forecast for the Topix is 1,450, about 27% above its current level. The index trades for about 15 times annual profits, close to the lowest in three years after all but 16 of its 1,775 constituents slid, the most since at least 1997. Twenty-one strategists tracked by Bloomberg predict the S&P 500 will reach 1,956 this year, on average, representing an 11% increase from its level now.
Forecasts like those did little to prop up shares in the U.S. Monday after a report showed factory output expanded in January at the weakest pace in eight months and China's official Purchasing Managers Index decreased to a six-month low as production and orders slowed. Signs of a weakening recovery come as the U.S. Federal Reserve moves ahead with plans to cut stimulus that has propelled a 160% rally in the S&P 500 since 2009.
It's worse in developing countries, where the MSCI Emerging Markets Index has dropped to a five-month low and losses in equity benchmarks from India, Russia, Brazil and Mexico have exceeded 4% so far in 2014. A custom Bloomberg index of the 20 most-traded emerging-market currencies has fallen about 2% this year.
Russia canceled a bond auction for the second consecutive week after the emerging-market rout sent yields on the nation's bonds maturing in 2028 to record highs. The Finance Ministry scrapped the sale after “an analysis of market conditions,” according to a statement on its website.
“The optimism for Russia is long gone,” said Vladimir Tsuprov, the St. Petersburg-based chief investment officer of TKB BNP Paribas, the investment partner of the French bank. “The only surprise for us was how quickly the ruble had declined in January. This was unexpected.”
Shocks began on Jan. 10, when the U.S. Labor Department said payrolls rose by 74,000 in December, below the 197,000 median forecast of 90 economists surveyed by Bloomberg.
LOSING MOMENTUM
Two weeks later, a report from HSBC Holdings PLC and Markit Economics Ltd. said Chinese manufacturing may contract for the first time in six months. That added to concern growth in the Asian nation, which buys everything from Chile's copper to South Korea's cars, is losing momentum. HSBC and Markit confirmed that manufacturing in the nation shrank in January.
Argentina's peso started sliding as the central bank pared dollar sales to preserve international reserves, which have fallen to a seven-year low. The central banks of India, Turkey and South Africa all raised interest rates to defend their currencies as they tumbled.
The result has been losses for seven of the last nine days in the MSCI All-Country World Index, erasing more than 5%. Stocks around the world are down for January after rising from September through December, the longest streak in a year.
“We've become addicted to having one decent month after another,” said Nicola Marinelli, who helps oversee $180 million as a fund manager at Sturgeon Capital Ltd. in London. “If you look back at what happened in 2011, 2008, this correction is simply one of thousands. So if you speak with dealers, speak with other investors, this isn't a feeling of panic.”
Buying at the depths of the European sovereign-debt crisis in October 2011 would have generated a total return of 51% in the MSCI gauge, according to data compiled by Bloomberg.
While Fed bond buying is being curtailed, it's because policymakers say the U.S. economy is strengthening. In announcing it will cut monthly purchases by $10 billion, the Federal Open Market Committee said Jan. 30 that labor-market data “were mixed but on balance showed further improvement” and economic growth that has “picked up in recent quarters.”
The Fed left unchanged its statement that the target interest rate will be left near zero “well past the time” that unemployment falls below 6.5%.
“Short-term forces in the U.S. point to continued growth in all major categories of demand, while the long-term EM growth story remains intact,” David Kelly, the chief global strategist at JPMorgan Funds, wrote in a note to clients. His firm oversees about $400 billion. “The plain fact is that very low domestic interest rates for investors holding the vast majority of global financial assets should continue to pull money away from fixed income and towards equities.”
Some strategists say the losses aren't over. Inflation-adjusted interest rates are still too low in developing nations for Citigroup Inc. to predict an end to the retreat in currencies. Argentina's peso tumbled 19% last month, while South Africa's rand plunged 5.7% and Russia's ruble dropped 6.5%.
Stock markets may continue declining, sending the Nikkei 225 Stock Average down as much as 25% from the peak, according to Tim Schroeders, who helps oversee about $1 billion as a money manager at Pengana Capital Ltd.
“Markets are vulnerable to a further correction,” Mr. Schroeders said Feb. 4. “The pullback could surprise some people. Perhaps the downside will be a little bit more than people think.”
MARKET MOMENTUM
Momentum in the U.S. stock market is slowing as the bull market enters its sixth year and after the S&P 500 surged 30% in 2013. Almost 200 companies in the benchmark gauge for American equities traded below their average level over the past 200 days Monday, more than any time last year, according to data compiled by Bloomberg.
Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record. More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.
Losses among commodities have been less than equities, with the S&P GSCI measure of 24 raw materials down 1.4% this year. Gold rallied 3.8% to $1,251.92 an ounce since the start of January. The London Metal Exchange index of six industrial metals including copper and aluminum has fallen 4.4% in 2014, the worst start to a year since 2010.
“There may not have been so many euphoric long positions in commodities as in equities,” said Bjarne Schieldrop, chief commodity analyst at SEB AB. “Everyone and their grandmother have rolled into equities as they continued to get higher day by day. Thus, there are not so many heading for the door in commodities when things look less optimistic.”
The global economy will grow 3.7% this year, up from an October estimate of 3.6%, the International Monetary Fund said in revisions to its World Economic Outlook released Jan. 21, citing accelerating expansions in the U.S. and U.K. Economies of Japan, Europe and the U.S. are forecast to expand together for the first time since 2010, according to data compiled by Bloomberg.
Even as emerging markets crater, the outlook for global earnings remains robust. Profits in the MSCI All-Country World Index are forecast to increase 17% this year and 11% in 2015 and 2016, according to analyst forecasts compiled by Bloomberg. Nader Naeimi, who helps oversee $131 billion as a money manager at AMP Capital Investors, said people bailing now may regret it.
“Some investors are schizophrenic,” Mr. Naeimi said. “You have started to see fear back in the market which you hadn't seen for some time. This is good from a contrarian perspective, to remove some froth from the market, reduce complacency and gives me a buying opportunity.”
The retreat since Jan. 23 has done little to dent the $9.6 trillion of stock value that was created worldwide in 2013, when the S&P 500 advanced 30% and the Topix climbed 51%. Speculation that developed-market equities were due for a retreat has built for months, including forecasts in January from Blackstone Group's Byron Wien and Nuveen Investment's Bob Doll Jr., who both called for a 10% drop.
“We should keep our calm,” said Karim Bertoni, a strategist at de Pury Pictet Turrettini & Cie, which manages about $3.3 billion. “A 10% decline wouldn't be surprising,” he said. “It's something that happens a couple of times of year, nothing per se unusual. That's why so far I think we are more in a classic correction than anything else.”
(Bloomberg News)
