Looking Back & Forward
A Tale of Two Halves: The rally in global equities hit a speed bump in October with the MSCI AC World Index ending the month down 1.5%, only the second month
of negative returns since the trough in March. Patchy macro data out of the US (Consumer confidence fell for the second straight month, housing starts
disappointed, retail sales plunged, while the unemployment rate inched towards the 10% level) left the markets jittery about the sustainability and strength of the
recovery. The result, equities pared back the gains of the first half of the month (the index was up 4.2% up to Oct. 19), declining 5.6% in the final days of the month.
Within the US, equity and cross-asset performance was consistent with the risk aversion in the marketplace in late October. The inconsistency came with the
continued outperformance of emerging markets over the developed world, yet the worst US daily performance (-2.8%) came on the final day of October, which has
yet to be reflected in the emerging markets. Among the world’s sectors, Consumer staples (2.1%) and Energy (2.0%) were the best performing sectors, while Utilities
(-4.7%) and Financials (-4.3%) were the sectors with largest declines.
On balance, the global economic recovery continues to strengthen with signs of improvement in most leading indicators (p. 23) and sentiment indices (p.
24). Monetary policy remains loose for now (despite hikes from the RBA, Norges Bank, and Bank of Israel), but a stabilizing global economy has led the markets to
begin to price in rate hikes despite central bank rhetoric (p.29).
Europe
European markets were down 1.2% this month. Markets rose for the first half by 4.2% and declined 5.2% in the second half of the month. Consumer staples (4.6%)
and energy (3.1%) were the best performing sectors, while tech (-7.6%) and utilities (-5.4%) had the biggest declines. Among countries, Poland (6.6%), Sweden
(4.6%), and Russia (4.5%) were the outperformers, while Ireland (-10.8%), Finland (-8.0%), and Austria (-5.6%) had the largest declines this month. Consistent with
the de-risking theme, large caps outperformed small caps, while growth outperformed value.
Europe remains cheap relative to the developed world, trading at a discount on a 12-month forward PE basis (p. 38). Valuation dispersion between US and Europe
has narrowed this month with the sector neutral discount down to ~15 % from cycle highs of ~33% (p. 47). Despite a 72% rally since the trough in March, European
valuations are not particularly stretched with the composite valuation indicator (CVI) lying close to the neutral zone (pg 48). Among the industry groups, pharma,
energy, and consumer services look cheap, but cons durables, real estate, and autos look less attractive than usual (pg 49).
Mixed economy data: UK’s 3Q09 GDP declined for a record sixth straight quarter. 3Q09 GDP declined 0.4% Q/Q, more than the expectation of a 0.1% decline,
after contracting 0.6% Q/Q in 2Q09. Regional surveys continued to tick upward, but sentiment indicators were mixed this month. The pan European PMI
Manufacturing index rose to a 16-month high of 49 (vs. 49 in Aug). The ZEW economic sentiment indicator fell below expectations to 56.9 (vs. 59.6 in the previous
month) while European business and consumer confidence came in better than expectation and Germany’s Ifo business confidence rose slightly. Better than
expected, Industrial production rose for the fourth straight month with production rising 0.9% m/m in August. Among countries, Italy surprised on the upside while
Germany was in-line and UK was below expectation. Unemployment in the Euro-zone continued to rise and stands at 9.6%, the worst level since March 1999.
Unemployment in Germany eased to 8.1% from 8.2% in the previous month.
Our European economist Elga Bartsch raised our Euro area 3Q09 GDP estimates from 0.2% q/q to 0.9% q/q and full year GDP from -4% to -3.7% on the back of
strong turnaround in the inventory cycle. But Elga doesn’t expect a V-shaped recovery and doesn’t change her fundamental view that the recovery will likely remain
lackluster. She believes the current bounce in inventory could potentially set up for disappointment, and a sizeable gap between inventories and orders could
potentially be a warning sign of a double-dip at the turn of the year.