Daily Equity Report

Some managers, like the ever bullish Ken Fisher, have outlined their bullish case for US and global market equities in this the second year after the 2008 bear.

The initial stage of the 2009 bull market was driven by an improvement in sentiment and a global wall of liquidity from various stimulus packages and central banks.

While the stimulus is still largely in place, Fishers’ view is that fundamentals should start to gain some traction as the year progresses. Some of the investment drivers that they have identified include:

• An overwhelming historical precedent for another positive year;
• Fast growing emerging market and a resurging global trade;
• Very lean corporate expense structures;
• Stock valuations that are not expensive, especially on a relative basis to interest rates;
• Monetary and fiscal policies that continue to provide tailwinds;
• Sentiment that remains sceptical.

Their work indicates that on the second 12 months after a bear market decline and a positive year, that this is also invariably positive. They looked at the S&P500 and noted that the one exception to this rule was after the 1932 bottom, when shares fell 0,4% before resuming an upward trajectory.

Fisher Investments presented the following table:

They then note 3 pillars of economic expansion:

1. Emerging market economies, which are already on a cumulative basis bigger than the US economy, should lead the world out of recession.

Source: IMF, Thomson Reuters, Consensus Economics

2. They note that business investment should continue to rebound shaprly as companies in general “play catch up after skimping on, and in fact savagely slashing capital expenditure and inventories during the last 18 months.”

Their view is that contrary to popular sentiment, firms are exceptionally healthy and in a good position to capitalise on the rebounding economy.

Balance sheets are generally strong, with high cash holdings, low debt and low borrowing costs.

These lean costs structures should give firms tremendous operating leverage. i.e. smaller gains on the revenue line translate into even bigger gains at the earnings level.

The note the consensus for S&P500 earnings growth in 2010 is 29,4%. The average earnings growth per annum since 1994 has been calculated at 6,5% with a decline of 76,6% in 2008 and 50,5% in 2001 and gains of 75,2% in 2003. Their view is that following large declines, the actual earnings gains could exceed current consensus.

Already this consensus is being upped as companies are reporting numbers ahead of expectations – see conclusion.

3. Strong emerging market growth and resurgence in business investment should bolster global trade, which fell severely in the recession.

Conclusion

With 98% of all companies in the US having now reported their 2009 earnings, the aggregate earnings number for the S&P500 in 2009 is coming in at around $56,5.

Analyst forecasts, which until now have been slightly behind the actual numbers, are forecasting earnings of up to $78 in 2010, and $94 in operating earnings in 2011, i.e. a possibly gain of some 38%, followed by 20%.

As we mentioned last week, taking a longer term view of say 5-7 years, global equity, and especially high quality companies are in absolute and relative terms at fair to good value.

Kind regards

Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966