The wisdom of (analyst) crowds ::Macquarie Research,

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The wisdom of (analyst) crowds
Event
 With Warren Buffett saying a US recession is unlikely, while the Economic
Cycle Research Institute confidently predicts one, we begin a series of notes
looking at indicators that predict GDP growth. In the first we look at earnings
revisions, the equity risk premium and the change in the S&P500 index.

Impact
 Historical relationships between GDP growth and analyst earnings
revisions, the equity risk premium and the change in the S&P 500 index
suggest the US economy is not in recession and is likely to see positive
but turtle-like growth up to at least June 2012. That said, while there has
been some better-than-expected economic data recently, the trend in all
three indicators so far this month remains negative. Given the high
equity risk premium and other indicators it is highly unlikely that US
economic growth will be strong over the next 12 months.
 While analyst estimates and the equity risk premium are useful leading and
coincident indicators, respectively, of US GDP growth, the change in the S&P
500 index is a more accurate predictor than the former two if you lag the 6
month change in the S&P 500 by 9 months. Using a simple linear regression
of these two variables, and based on the change in the S&P 500 to
September, US GDP growth would be 1.0% in the year to June 2012.

Outlook
 While our analysis suggests the US economy will stave off recession,
we continue to believe that there needs to be a sell-off in US 10 year
Treasury bonds in the order of 50 to 100 basis points before there is
sustained upward momentum in global equities markets. A resolution
to the crisis in Europe would be a catalyst for such an asset allocation
switch, but the seasonal improvement in economic data in coming
months could also prompt a rally that lasts 3 to 4 months.
 With the S&P 500 equity risk premium at its highest level since 1973, at just
over 3 standard deviations above the long term average, equities are cheap
relative to bonds. Long term investors should therefore be looking to invest
more in equities, and with a slightly less defensive strategy to position for the
seasonal winds that typically lift equity returns between November and April.
 With the equity risk premium at such elevated levels, we would expect growth
to outperform value. This reflects the fact that many apparently cheap stocks
are value traps in weakening economic conditions.
 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. We also
highlight the conviction buy ideas in our European MarQuee. The list
includes defensive stocks like Tesco (TSCO LN) and Vodafone (VOD LN)
plus cyclical plays like BP (BP/ LN) listed in the UK, which is a favoured
country in the Macquarie Country Alpha model.