By Whitney Kisling & Adria Cimino - Feb 4, 2013 11:36 AM GMT+0400
Stocks in the world’s developed nations posted the best start to a year in two decades, a sign the global economy is poised to accelerate after contractions in Japan, the U.S. and Europe, if history is a guide.
The MSCI World Index (MXWO) of stocks in 24 markets rose 5 percent in January, the most since 1994, as individual investors pumped record deposits into mutual funds, U.S. profits increased for an 11th quarter, central banks kept interest rates at record lows and growth from Europe to China improved. The last two times stocks gained this much in January, world gross domestic product expanded at least three times the 2.4 percent that economists forecast for 2013, according to data compiled by Bloomberg.
A woman walks a dog in front of the New York Stock Exchange (NYSE) in New York on Feb. 1, 2013. The S&P 500 rose to within 4 percent of an all-time high as the Federal Reserve keeps interest rates near zero and continues to buy government bonds with the jobless rate at 7.9 percent. Photographer: Jin Lee/Bloomberg
While market strategists say that equities have already recorded most of this year’s gains, bears who predicted declines at this point in 2012 only to see the Standard & Poor’s 500 Index (SPX) close up 13 percent, are being overlooked. Bulls say the rally is just getting started after U.S. investor sentiment rose to a two-year high and billionaire Warren Buffettoffered to buy the parent of the New York Stock Exchange.
“People are just positive that the economy is really going and now they’re putting money in the stock market,” Jerome Dodson, whose Parnassus Fund has beaten 99 percent of its peers in the past five years, said in a Jan. 29 phone interview. He oversees about $7.3 billion in San Francisco. “There’s much more confidence that the economy’s on stronger ground now.”
Global Rally
Shares in Portugal have beaten every developed market this year as investors bet Europe’s debt crisis is subsiding. Chinese stocks entered a bull market, signaling the world’s fastest- growing major economy is gaining traction following seven consecutive quarters of slowing growth.
Japan’s Nikkei 225 Stock Average surged to the highest level since April 2010 as new Prime Minister Shinzo Abe succeeded in depreciating the yen by 7 percent against its biggest trading partners, according to Bloomberg Correlation- Weighted Indexes. In the U.S., the S&P 500 rose to within 4 percent of an all-time high as the Federal Reserve keeps interest rates near zero and continues to buy government bonds with the jobless rate at 7.9 percent.
U.S. stocks rose last week, with the S&P 500 adding 0.7 percent to 1,513.17, led by Valero Energy Corp. and Hess Corp., and the Dow Jones Industrial Average exceeding 14,000 for the first time since October 2007. The MSCI World Index and the MSCI All-Country World Index (MXWD), which also includes emerging markets, each climbed 0.8 percent. In 11 recessions from 1938 through 2009, U.S. stocks rebounded an average of five months before a recovery in earnings, Bloomberg data show.
January Gains
S&P 500 future slipped less than 0.1 percent at 7:29 a.m. in London today. The MSCI Asia Pacific Index rose 0.8 percent.
January equity rallies of this size have come in years when the world economy expanded more than average, data compiled by Bloomberg show. The MSCI World advanced 6.4 percent at the start of 1994, and gross domestic product increased 7.7 percent that year, 1.2 percentage points more than the average since 1980. In 1987, stocks were up 12 percent in the first four weeks, and the economy grew 14 percent.
“I’ve been saying to my co-workers it’s the first time in years that I’ve felt like I could sleep at night and not worry because the underlying tone to the market and underlying fundamentals are OK,” said Jeffrey Burchell, a fund manager with Toronto-based Aston Hill Financial Inc. (AHF), which oversees C$6.4 billion ($6.42 billion) in North America. “The unknowns and things we’re afraid of are getting less every day.”
Economic Growth
The U.S. economy expanded 2.2 percent in 2012, compared with the 2.1 percent that was forecast at the start of the year in a Bloomberg survey. Growth around the world is forecast to be 2 percent this quarter and 2.4 percent in the following three months, based on the median estimate from economists surveyed by Bloomberg. That compares with average 2.6 percent expansion since 1996.
Jerome Forneris at Banque Martin Maurel bought shares in Intesa Sanpaolo SpA (ISP), Italy’s second-biggest bank, to benefit from last month’s 7.2 percent rally in the FTSE MIB Index. David Herro, the Chicago-based manager of the $12.9 billion Oakmark International Fund, said he has favored Japanese stocks such as Daiwa Securities Group Inc. (8601), Toyota Motor Corp. (7203) and Canon Inc. (7751) as the Nikkei 225 also jumped 7.2 percent in January.
Buffett’s Berkshire Hathaway Inc. made an offer for NYSE Euronext (NYX), the New York-based owner of the largest U.S. equity exchange, on Nov. 28. The bid, though rejected, indicates the world’s most successful investor expects trading to increase after individuals fled the market following the 2008 crash, according to E. William Stone, who helps oversee $112 billion as chief investment strategist at PNC Wealth Management.
Fund Flows
Investors have poured $10.4 billion into developed equity mutual funds around the world this year, compared with outflows of $2.5 billion last year, according to data from EPFR Global, the Cambridge, Massachusetts-based research firm. They withdrew about $250 billion from U.S. funds in the past four years, scarred by the 2008 financial crisis that wiped out $11 trillion in American equity market value.
Bullishness reached a two-year high last month, a survey from the American Association of Individual Investors showed on Jan. 24.
With so many indicators pointing higher, some analysts see signs the bull market that started in March 2009 is closer to the end than to the beginning. The gauge of individual investor sentiment is near to registering a sell signal, according to JPMorgan Chase & Co.’s chief U.S. equity strategist, Thomas Lee.
Stock Volatility
The Chicago Board Options Exchange Volatility Index is down 28 percent to 12.9 this year, near the lowest level since April 2007. The slump in the VIX (VIX), a gauge of options prices on the S&P 500, suggests investors are growing complacent, Myles Zyblock, chief institutional strategist at Royal Bank of Canada, said in a research report last week.
The last time the VIX fell below 15 was in October following a 15 percent rally in the S&P 500. Stocks lost 7.4 percent the next month. A five-year bull market pushed the options gauge below 15 for most of 2007. The S&P 500 peaked that year and plunged 57 percent through March 2009.
This year still may be a repeat of 2012, when January’s gain in the MSCI World index was followed by a 5 percent slide during the next four months, according to Binay Chandgothia, a money manager at Principal Global Investors who sold stocks in the past two weeks and plans to keep reducing holdings as the market rallies.
‘Biggest Risk’
“The biggest risk is that there’s been too much short-term momentum,” Chandgothia, who helps oversee more than $250 billion, said in a Jan. 30 phone interview from Hong Kong. “Our risk-environment indicator is almost getting into frothy territory. A couple of significant data points that disappoint can cause the market to correct.”
The Bloomberg Consumer Comfort Index dropped for a fourth straight week in the period ended Jan. 27 as Americans’ outlook on spending soured, a sign increased taxes are already starting to ripple through the economy. A U.S. worker earning $50,000 a year is taking home about $83 less a month because of the payroll tax increase that took effect last month.
Investors should also be “cautious” because U.S. lawmakers face March deadlines on spending plans and Italy is preparing to hold elections, said Emmanuel Soupre, a fund manager who helps oversee $4 billion at Neuflize Private Assets in Paris. The world’s largest economyunexpectedly contracted 0.1 percent last quarter after the biggest drop in defense spending in four decades.
‘Speculative Euphoria’
“The market has gained quite a bit, so it’s best to wait until we can see more clearly,” Soupre said on Jan. 29. “There has been a lot of speculative euphoria. The crisis isn’t over.”
A. Gary Shilling, the U.S. economist who predicted a year ago that stock investors would face a difficult year as America headed back into a recession, now says confidence could quickly evaporate. In a Jan. 31 essay for Bloomberg View, he said bullish investors will probably be forced into an “agonizing reappraisal by a shock,” such as a slowdown in China or a jump in the price of oil triggered by an Iran-related incident.
The S&P 500 will rise 2 percent to 1,543 by the end of 2013, according to the average projection of 15 Wall Street strategists surveyed by Bloomberg.
Corporate earnings in the U.S. are too healthy for the rally to end, said Michael Shaoul, the chairman and chief executive officer at Marketfield Asset Management LLC in New York. Some 73 percent of the 254 companies in the S&P 500 that have released results since Jan. 8 have topped analysts’ profit projections, data compiled by Bloomberg show.
Earnings Season
Profits in the S&P 500 will increase 7 percent in 2013 and executives are the most optimistic at the start of a year since 2011, according to data on revised guidance compiled by Bloomberg. The ratio of U.S. companies raising forecasts compared to those lowering them increased to 0.85 last month, according to data on the 20-day average. Last year, the ratio fell to 0.3, the lowest since April 2009.
“We might have seen the best month for the year, but I think that we are entering the mature phase of the equity market, which involves a lot more participation and upside volatility,” Shaoul, whose firm oversees more than $5 billion, said Jan. 29. “Most encouragingly, this has largely been a bottom-up rally with individual stocks reacting to earnings that have generally beaten expectations.”
Correlation Declines
The lockstep moves in global stocks that dominated markets for the past six years are breaking down at the fastest rate since at least 1993, a sign investor confidence is returning. A measure of how much the 2,073 companies in the FTSE All-World Developed Index swing in unison dropped 31 percent in the six months through Jan. 25, according to data compiled by Societe Generale SA and Bloomberg.
Increased levels of debt and more hiring are also giving investors reasons to be bullish. U.S. loans totaled more than $460 billion in the last three months of 2012, the most since the second quarter of 2011, data compiled by Bloomberg show. American employers added 157,000 workers last month while the unemployment rate rose to 7.9 percent, a government report showed last week.
An acceleration in loans “reflects more confidence by lenders as well as by borrowers,” Ed Hyman, founder and lead analyst at International Strategy & Investment Group in New York, wrote in a report e-mailed Jan. 29. “Increased confidence by lenders is the same animal spirit that would be associated with hiring.”
Missed Rally
Stock gains are likely to continue as pressure to increase allocations mounts for investors who stayed out of the market, said Daphne Roth, the Singapore-based head of Asia equity research at ABN Amro Private Bank, which oversees about $207 billion. A net 51 percent of global fund managers had bullish positions on equities in January, four times the level at the start of 2012, according to a Bank of America Corp. survey of 190 investors overseeing about $586 billion.
“There are lots of people that have missed this rally,” Roth said in a Jan. 30 phone interview. “Everyone is starting to recognize that the world is slowly but surely recovering, that equities aren’t expensive and earnings are improving.”
Economic confidence in the euro region rose to a seven- month high in January, adding to signs that the 17-nation currency bloc may be emerging from a recession.
Bonds of bailed-out euro-area members and debt-laden Italy have posted bigger gains this year than the securities of countries outside the single currency. Greece’s debt rallied 17 percent, the best performance among indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Ireland’s bonds jumped 8.4 percent, Spain’s notes gained 8.2 percent and Italy’s increased 7.7 percent.
Rally Prospects
“The rally can continue,” Forneris, who helps manage $8.5 billion at Banque Martin Maurel in Marseille, said in a Jan. 29 interview. “We are very bullish on equities. The economic environment in Europe is improving and so is confidence.”
Forneris said he started buying Italian stocks last year, and holds shares in Intesa Sanpaolo and Rome-based Eni SpA (ENI), the nation’s largest oil producer.
China’s Shanghai Composite Index (SHCOMP) entered a bull market on Jan. 29, rebounding 20 percent since dropping to the lowest level in almost four years on Dec. 3. The nation’s exports rose more than forecast last month, while a broad measure of credit surged 28 percent.
Around the world, stocks have traded at an average 17.6 times reported earnings since the bull market began, and the MSCI index’s multiple was 16.6 last week. That’s still 22 percent below its average since 1995, Bloomberg data show.
“Who knows what the future holds,” Herro, Morningstar Inc.’s international fund manager of the decade, said in a Jan. 29 interview. “But stocks still look undervalued on an absolute basis and a screaming bargain compared to bonds.”
To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Adria Cimino in Paris at acimino1@bloomberg.net
To contact the editors responsible for this story: Andrew Rummer at arummer@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net
