Global Horizon-- Revisions ratio vs Seasonality signal ::Macquarie Research,

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Global Horizon
Revisions ratio vs Seasonality signal
Event
 Compared to bonds, global equity markets still look cheap. That said, with
earnings under pressure due to slowing global growth, we look at analyst
EPS revisions as a signal as to whether equity markets have bottomed.
 With the seasonally strong period of the year approaching we also highlight
areas of the market that typically outperform between November and April.
Impact
 On almost all relative value measures, global equity markets look
cheap. The MSCI All Country World is currently on 10.4 times forward
earnings, a forward dividend yield of 3.2% and an enterprise value to
EBITDA multiple of just over 6 times. These numbers are around 1.7
standard deviations below the average for the last 20 years.
 The problem is that earnings expectations continue to fall, so equities
may not be as cheap as they look. This is shown by the revisions ratio for
MSCI AC World, which was 0.51 in mid-September, compared to 0.87 at the
end of August. As this number is higher than the lows seen in 1991, 2001
and 2008, there is still some downside risk to revisions. That said, current
ratios do suggest that slowing global growth is increasingly priced in,
especially in MSCI Europe where revisions are down to 0.36. With MSCI
Europe on a forward PER of 8.8 times, stocks in the region should generate
strong returns when investors are more confident in forecast earnings.
 Recently we have highlighted that the best buying opportunities tend to
occur in September and October, as returns from November to April tend to
be higher, less volatile, and are more likely to be positive. Over the last 20
years, analysis of the S&P Global BMI shows that seasonality favours
cyclicals over defensives and emerging over developed. In terms of
sectors, Materials generated the best returns, beating the market by an
average of 3.8% between November and April, and with the sector
outperforming in 3 out of 4 of these periods since 1991.
Outlook
 We continue to believe that there will be a sell-off in US 10-year bonds
in the order of 50 to 100 basis points before there is sustained upward
momentum in global equities markets. That said, we recommend some
increase in equity exposure, and a slightly less defensive strategy,
over the remainder of September and October to position for the
seasonal winds that typically lift returns from November to April.
 With the revisions ratio for Europe already close to recessionary lows, due to
slowing growth and the ongoing sovereign debt crisis, we see buying
opportunities in stocks leveraged to growth in emerging markets. With the
Macquarie Country Alpha model currently favouring the UK, and given the
seasonality boost expected for Materials, we would highlight Rio Tinto (RIO
LN), Xstrata (XTA LN) and Anglo American (AAL LN).