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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We think the world economy will grow
just 1.9% this year, as the eurozone falls
into recession and the US grows 1.5%
Equities will produce meagre returns,
while in bonds, we prefer investment
grade to sovereigns
We expect the euro to be resilient
against the dollar
Investors can rarely have faced such uncertainty heading into
a new year. The eurozone debt crisis – and how it is resolved
– casts a huge shadow over the global economy.
Our central assumption is that the eurozone survives, but
more work is needed to restore confidence, including more
aggressive action from the ECB to ease strains in the
sovereign debt markets and the banking system.
We believe that the prospect of closer integration will
underpin the single currency, making it difficult to see EURUSD
weakening much in coming months.
We see little upside for equities. We have a year-end target of
1,250 for the S&P 500 – putting us at the bearish end of the
scale – and expect global equities to rise just 2% this year.
In bonds, given the risk-adjusted returns on offer, we think
investment grade credit and even high yield offer better
prospects than sovereigns. In addition, we see relative value
compared to equities and commodities.
Emerging markets will again offer a cushion, growing
5.3% in 2012, against just 0.6% GDP growth for the
developed world.
Navigating a turbulent world
A fat tail at both ends
The normal cyclical progression of equities – with
a bull market continuing until it is choked off by
rising rates and slowing growth – looks unlikely
in the coming years. Instead, we believe extreme
outcomes are more probable. A severe outcome –
with a collapse of the eurozone triggering a deep
global recession, perhaps exacerbated by
structural problems in China – is not impossible.
However, since equity valuations are inexpensive
and investors are already bearishly positioned, an
upside surprise cannot be ruled out either.
Imagine how stocks would react if Germany were
to agree to the issuance of Eurobonds and the
European Central Bank (ECB) were to start fullblown
quantitative easing (QE). Global equities
rallied 80% in the nine months after March 2009,
when the Fed began QE and the US government
recapitalised banks through the Troubled Asset
Relief Program (TARP).
In this environment, we continue to see stock
markets remaining volatile and stuck in a trading
range. Stock markets are likely to drop each time
European sovereign funding issues resurface and
each time there are questions over the
sustainability of economic growth. However, we
believe equities will be cushioned by low
valuations (for example, PB in Europe ex UK is
only 10% above the March 2009 low) and by
hopes of a policy response to the eurozone debt
problem and of central bank easing: the Fed has
clearly signalled that it will reopen QE if needed.
Our current index targets imply little upside for
stocks in 2012. For example, we target the S&P
500 Index at 1,250 by end-2012, roughly its
current level. Our estimate is the lowest strategist
target collected by Bloomberg. (The median is
1,345.) For global equities, we see just 2% upside
to the end of 2012.
Growth and risk
In an uncertain environment, it helps to simplify.
When we boil it down, just two concepts drive index
return: earnings growth and the multiple applied to
those earnings (an indicator of risk appetite).
The chart above disaggregates the annual change
in the MSCI All Country World Index (ACWI)
for each year since 1988 into the change in the
12-month forward PE during the year and EPS
growth. The poor return in 2011 (with ACWI
down 9%) was caused by a large derating, despite
decent earnings performance.
The key questions then for 2012 are: (1) can
equities conceivably be derated again, perhaps
because risk rises even further, and (2) can earnings
continue to grow in the face of an uncertain
economic environment? The answer to both
questions is particularly difficult to formulate at the
moment. The degree of risk aversion will depend
largely on politicians’ decisions. Trying to forecast
how politicians will act is difficult and something
investors do not like to do. On earnings, in a world
where HSBC’s economists see anaemic economic
growth (1.5% for the US and -1.0% for the
eurozone), analysts’ forecasts of 10% EPS growth
in 2012 for most regions seem hard to achieve.
Themes for 2012
In light of the highly uncertain macro outlook
described above, how should investors be
positioned? We asked our analysts around the
world to highlight the themes they thought would
drive relative stock performance over the next 12
months. We can boil these down to four metathemes
that we see driving equity markets
globally over the coming 12 months.
Earnings resilience. We prefer companies
with earnings that can buck the likely trend of
forecast downgrades.
Structural growth. Companies with strong
underlying growth where this is not priced in.
Unusually, growth stocks do not trade at a
premium currently.
Balance-sheet strength. With a credit crunch
a real risk in 2012, especially in Europe, we
look for companies that are best positioned to
deal with tight credit conditions: those with
low gearing and strong cash generation.
Pricing anomalies. With market correlation
rising and valuation dispersion falling over the
past 12 months, pricing on many stocks has
moved out of kilter. In some cases, stocks have
fallen back to their 2008-09 valuation lows.
Country and sector views
We use the same themes to analyse which
countries and sectors to overweight in a global
equity portfolio. We have adjusted the scorecards
we use in our allocation process to reflect our
investment themes. Therefore, we place more
emphasis on growth surprises, the long-term story
and valuation, and somewhat less than usual on
monetary policy (likely to be eased everywhere),
newsflow/shocks (hard to forecast in a turbulent
world) and investor positioning.
We expect emerging markets to bounce back this
year, following a difficult 2011, as hard
landing/inflation fears fade and the focus shifts
back to the structural growth premium and greater
policy flexibility offered by the developing part of
the world. Our biggest overweights in EM are
China, Russia and India. We are also overweight
Asia ex Japan. Within EM, we are less
enthusiastic about Mexico, Korea and South
Africa (all underweight).
Elsewhere, we are neutral on the US and Europe
(including the UK), but underweight on the
eurozone and Japan.
At the sector level, our overweights are telecoms,
materials and energy. We believe both telecoms
and energy should benefit from relatively resilient
earnings in a deteriorating macro environment,
and we continue to like materials for its exposure
to the strong secular demand story in the
emerging world.
Our key changes this quarter are to take both
financials and consumer discretionary to
underweight from neutral (raising consumer
staples and industrials). On consumer
discretionary we think valuations are not that
compelling and that the sector will suffer from a
slowdown in consumer spending in 2012.
Financials remain cheap, but we believe the longterm
story is negative and there are significant
risks to growth in the near term. We remain
underweight utilities, but are more positive on the
sector in Europe than elsewhere
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We think the world economy will grow
just 1.9% this year, as the eurozone falls
into recession and the US grows 1.5%
Equities will produce meagre returns,
while in bonds, we prefer investment
grade to sovereigns
We expect the euro to be resilient
against the dollar
Investors can rarely have faced such uncertainty heading into
a new year. The eurozone debt crisis – and how it is resolved
– casts a huge shadow over the global economy.
Our central assumption is that the eurozone survives, but
more work is needed to restore confidence, including more
aggressive action from the ECB to ease strains in the
sovereign debt markets and the banking system.
We believe that the prospect of closer integration will
underpin the single currency, making it difficult to see EURUSD
weakening much in coming months.
We see little upside for equities. We have a year-end target of
1,250 for the S&P 500 – putting us at the bearish end of the
scale – and expect global equities to rise just 2% this year.
In bonds, given the risk-adjusted returns on offer, we think
investment grade credit and even high yield offer better
prospects than sovereigns. In addition, we see relative value
compared to equities and commodities.
Emerging markets will again offer a cushion, growing
5.3% in 2012, against just 0.6% GDP growth for the
developed world.
Navigating a turbulent world
A fat tail at both ends
The normal cyclical progression of equities – with
a bull market continuing until it is choked off by
rising rates and slowing growth – looks unlikely
in the coming years. Instead, we believe extreme
outcomes are more probable. A severe outcome –
with a collapse of the eurozone triggering a deep
global recession, perhaps exacerbated by
structural problems in China – is not impossible.
However, since equity valuations are inexpensive
and investors are already bearishly positioned, an
upside surprise cannot be ruled out either.
Imagine how stocks would react if Germany were
to agree to the issuance of Eurobonds and the
European Central Bank (ECB) were to start fullblown
quantitative easing (QE). Global equities
rallied 80% in the nine months after March 2009,
when the Fed began QE and the US government
recapitalised banks through the Troubled Asset
Relief Program (TARP).
In this environment, we continue to see stock
markets remaining volatile and stuck in a trading
range. Stock markets are likely to drop each time
European sovereign funding issues resurface and
each time there are questions over the
sustainability of economic growth. However, we
believe equities will be cushioned by low
valuations (for example, PB in Europe ex UK is
only 10% above the March 2009 low) and by
hopes of a policy response to the eurozone debt
problem and of central bank easing: the Fed has
clearly signalled that it will reopen QE if needed.
Our current index targets imply little upside for
stocks in 2012. For example, we target the S&P
500 Index at 1,250 by end-2012, roughly its
current level. Our estimate is the lowest strategist
target collected by Bloomberg. (The median is
1,345.) For global equities, we see just 2% upside
to the end of 2012.
Growth and risk
In an uncertain environment, it helps to simplify.
When we boil it down, just two concepts drive index
return: earnings growth and the multiple applied to
those earnings (an indicator of risk appetite).
The chart above disaggregates the annual change
in the MSCI All Country World Index (ACWI)
for each year since 1988 into the change in the
12-month forward PE during the year and EPS
growth. The poor return in 2011 (with ACWI
down 9%) was caused by a large derating, despite
decent earnings performance.
The key questions then for 2012 are: (1) can
equities conceivably be derated again, perhaps
because risk rises even further, and (2) can earnings
continue to grow in the face of an uncertain
economic environment? The answer to both
questions is particularly difficult to formulate at the
moment. The degree of risk aversion will depend
largely on politicians’ decisions. Trying to forecast
how politicians will act is difficult and something
investors do not like to do. On earnings, in a world
where HSBC’s economists see anaemic economic
growth (1.5% for the US and -1.0% for the
eurozone), analysts’ forecasts of 10% EPS growth
in 2012 for most regions seem hard to achieve.
Themes for 2012
In light of the highly uncertain macro outlook
described above, how should investors be
positioned? We asked our analysts around the
world to highlight the themes they thought would
drive relative stock performance over the next 12
months. We can boil these down to four metathemes
that we see driving equity markets
globally over the coming 12 months.
Earnings resilience. We prefer companies
with earnings that can buck the likely trend of
forecast downgrades.
Structural growth. Companies with strong
underlying growth where this is not priced in.
Unusually, growth stocks do not trade at a
premium currently.
Balance-sheet strength. With a credit crunch
a real risk in 2012, especially in Europe, we
look for companies that are best positioned to
deal with tight credit conditions: those with
low gearing and strong cash generation.
Pricing anomalies. With market correlation
rising and valuation dispersion falling over the
past 12 months, pricing on many stocks has
moved out of kilter. In some cases, stocks have
fallen back to their 2008-09 valuation lows.
Country and sector views
We use the same themes to analyse which
countries and sectors to overweight in a global
equity portfolio. We have adjusted the scorecards
we use in our allocation process to reflect our
investment themes. Therefore, we place more
emphasis on growth surprises, the long-term story
and valuation, and somewhat less than usual on
monetary policy (likely to be eased everywhere),
newsflow/shocks (hard to forecast in a turbulent
world) and investor positioning.
We expect emerging markets to bounce back this
year, following a difficult 2011, as hard
landing/inflation fears fade and the focus shifts
back to the structural growth premium and greater
policy flexibility offered by the developing part of
the world. Our biggest overweights in EM are
China, Russia and India. We are also overweight
Asia ex Japan. Within EM, we are less
enthusiastic about Mexico, Korea and South
Africa (all underweight).
Elsewhere, we are neutral on the US and Europe
(including the UK), but underweight on the
eurozone and Japan.
At the sector level, our overweights are telecoms,
materials and energy. We believe both telecoms
and energy should benefit from relatively resilient
earnings in a deteriorating macro environment,
and we continue to like materials for its exposure
to the strong secular demand story in the
emerging world.
Our key changes this quarter are to take both
financials and consumer discretionary to
underweight from neutral (raising consumer
staples and industrials). On consumer
discretionary we think valuations are not that
compelling and that the sector will suffer from a
slowdown in consumer spending in 2012.
Financials remain cheap, but we believe the longterm
story is negative and there are significant
risks to growth in the near term. We remain
underweight utilities, but are more positive on the
sector in Europe than elsewhere
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