The Party Could Be Over Soon For Global Equities?

On Business Times: Global equities overbought, set to fall: JPMorgan

• Global equities overbought, set to fall: JPMorgan
  
  Published: 2009/06/05
  
  HONG KONG: Global stocks are "overbought" and are set to fall in coming months because recent signs of an economic recovery are not sustainable, JPMorgan Asset Management said.
  
  The fund management company, which oversees US$1.1 trillion (US$1 = RM3.50) of global assets, is "underweight" equities, Geoff Lewis, Hong Kong-based head of investment services told reporters in the city yesterday.
  
  "All markets look overbought in the short term," Lewis said. "Markets have gotten ahead of themselves after such a strong run. We'll see some sort of correction during summer months."
  
  The MSCI World Index has surged 43 per cent from a 13-year low on March 9 as investors speculated government stimulus efforts worldwide will ease the global economic slump. Companies on the gauge trade at an average valuation of 18 times trailing earnings, the highest level since December 30 2004.
  
  "History suggests that it takes four years for economies to recover fully following banking crises, though during the period we'll see pretty sharp rallies; we're still in one of those rallies," Lewis said. "Things are not getting bad as quickly, which is different from saying things are getting better."
  
  Lewis' views echoed those of Aberdeen Asset Management Group's Nicholas Yeo, who said on Wednesday earnings prospects couldn't justify a three-month rally in Hong Kong stocks. Hong Kong's Hang Seng Index has surged 63 per cent from a four-month low on March 9.
  
  Within equity markets, JPMorgan is "overweight" Asia-excluding Japan as China's stimulus policies give more confidence in an Asian recovery, Lewis said. Hong Kong stocks will also benefit from close association with China and increasing global liquidity, he said.
  
  Investors should buy Indian and Brazilian shares, as their companies are less dependent on exports for earnings, Aberdeen Asset Management Group said.
  
  "In India, rural demand remains very high," Andrew Gillan, who helps oversee more than US$25 billion in Asia for Scotland's largest independent money manager, told reporters in Taipei yesterday, preferring consumer shares. "These countries are almost isolated from what's going on elsewhere."
  
  Gillan said he favoured faster-growing emerging markets over developed nations, as Western developed countries were set back further by the financial crisis. India is the third-best performing stock market this year, while Brazil is ranked 12 worldwide, as equities rebound from last year's global rout.
  
  India, Asia's third-largest economy, expanded 5.8 per cent in the three months to March 31, while the US economy shrank at a 5.7 per cent annual pace in the first quarter.
  
  South Korean, Taiwanese and Russian stocks aren't favoured because "they are at the mercy of exports, even if the company is well-managed," Gillan said at a press conference in Taipei.
  
  Exceptions are stocks that pay good dividends, such as Taiwan Semiconductor Manufacturing Co. The world's largest maker of chips designed by other companies, among Aberdeen's top 10 shareholdings, said on February 10 its board plans to pay a cash dividend of NT$3 and a stock dividend of 0.5 per cent per share for 2008. - Bloomberg

And Jesse made some interesting comments: The Stock Market in Context with the Great Crash of 1929 - 1932

• The economic policy of the early post-Crash period was heavily influenced by what was later called Liquidationism epitomized by prevailing views of the Hoover Administration. The idea was that allowing companies and banks to fail as quickly as possible, in a relatively uncontrolled manner, was the appropriate response. This view is still held by the Austrian School of economics.
  
  The flaw in this theory would seem to be that the decline of a crash is not like a natural decline in a business cycle or a severe demand contraction, but the result of a precipitous collapse from a Ponzi-like monetary and credit expansion.
  
  One can argue this point, endlessly if they wish to ignore history and economic reality, but again we need to remember that the outcome in several other nations embracing this theory was the rise of militant, fascist political regimes in response to societal dislocations.
  
  Obviously the best cure is prevention, in not allowing monetary bubbles in the first place. Duh. But one has to play with the cards in one's hand, and not the hand they wish to have.
  
  But there is a lesson in this for our current 'cure' in that blowing yet another asset bubble from a monetary expansion, and little else, will not work. We ought to have learned this from the Fed's policy responses in 2003-2006 which led to the US housing bubble.
  
  Systemic reform and rebalancing is absolutely essential to a sustained economy recovery, and needs to be measured by an increasing median wage and a reversion to manageable income - debt ratios.
  
  The headwinds against this remedy from an outsized financial sector that in many cases has coopted the political process makes a sustained economic recovery less probable without a significant shock to the political and economic structures of the US at least. (do give the rest of the editorial a read. :D )