Global Horizon -- Revisions a coal mine canary too :Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Global Horizon
Revisions a coal mine canary too
Event
 In our last note, Bonds the canary in the coal mine we highlighted that a selloff
in US Treasury bonds would be the lead indicator for a more sustained rise
in equity markets. Since then bond yields are 46bps above the recent low but
still below the forward dividend yield for the S&P 500.
 Another likely signal for a low in equity markets is the earnings revisions ratio,
and this note explains why the best time to buy equities tends to be when
revisions are still negative, but the trend starts to rise. We also look at the
effectiveness of OECD leading indicator (LI) as a timing tool.
Impact
 Earnings revisions have become even more strongly correlated with global
equity returns over the last ten years, with a correlation between trailing six
month returns for the MSCI AC World and earnings revisions of 81%.
 Earnings revisions also tend to lead the OECD LI at turning points in the
economy, reinforcing the point made in The wisdom of (analyst) crowds that
collectively analysts are a good leading indicator for the economy.
 Earnings revisions are also a useful market timing tool. Since 1988, forward
12-month TSRs for the MSCI AC World averaged 5.6% when revisions were
negative and declining, as they are now. That said, investors shouldn’t wait for
earnings revisions to turn positive as revisions are a contrary indicator and
the highest returns tend to occur when earnings revisions are negative, but
the six month trend is rising. These periods have averaged a 12-month
forward return of 13.2%, compared to 8.9% for all 12-month periods.
 The OECD LI can also be used as a timing tool, and the results show global
equity returns tend to be weakest when the indicator is both negative and
falling, as it is now. That said, in his October 19th strategy note, Peter Eadon-
Clarke argues a normal downcycle lasts around seven months. With the
OECD LI going negative in July, he expects it to trough in January 2012. On
this basis, equity returns would start to improve in the New Year, before
accelerating when the leading indicator rises into positive territory.
Outlook
 With the S&P 500 risk premium at record highs, equities are cheap relative to
bonds on a long-term view. There has already been some ‘risk on’ move
ahead of the European summit and G20 meeting. We continue to look for
stronger returns going into the New Year due to seasonality, and also ahead
of an expected trough in revisions ratio and the OECD LI in early 2012.
 Based on our Country Alpha Model we favour US and UK equities in
developed markets, and Korea in emerging. Specific names we like include
Coach (COH US), Hyundai Mobis (012330 KS), IBM (IBM US), Samsung
Electronics (005930 KS), Simon Property (SPG US), Tesco (TSCO LN)
and Verizon (VZ US). We also have a bearish near term view on resources,
although lower commodity prices will be positive for growth and margins for
industrial companies and developed markets ex-Australia and Canada.