Weekly Broker Wrap: Frustration’s All Around Us

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By Rudi Filapek-Vandyck, Editor FNArena

Frustrated? Maybe there's some solace in knowing that your frustrations regarding the share market are widely shared among funds managers and professional investors across the six continents. BTIG Chief Global Strategist Dan Greenhaus reported this week his visits to offshore clients had revealed clear frustration on their behalf. Problems in Europe are not going to be resolved in a hurry and in the meantime markets remain headline driven, volatile and directionless, regardless of underlying fundamentals.

Head of the institutional desk at Goldman Sachs in Australia, Richard Coppleson, reported on Friday many institutions in Australia have decided to take an early holiday this year, effectively moving into Christmas mode one month earlier than usual as the overhang of Europe on global equity markets is deemed "just too hard". This easily explains why overall trading volumes at the ASX have remained anaemic post the October bounce. As many of these funds managers are not expected to return before late January, Coppleson believes we may have to get used to ultra-thin trading volumes for at least the the next 2.5 months.

"The ship seems to have sailed for the year", concludes Coppleson. He adds that history shows long periods of sub par trading activity will always be followed by a spark that fires the instos up, which then triggers two or three months of frenzied trading activity as those instos on the sidelines come pouring back into the markets. Unfortunately, he acknowledged on Friday, "that time is not in the near term".

I visited a stockbroker on Friday who for the first time in a long while admitted he had run out of ideas while his clients had all but given up on a short term change in the overall outlook for equities. He said his clients' portfolios contained millions of dollars in cash, but none had any appetite left to put some of it in the share market. Low valued industrials, solid dividend stocks, defensive plays, his clients had done it all until October, but those avenues had now become saturated. Frustration galore is probably a mild way to describe the overall sentiment in and around investment circles these days.

In the meantime, analysts and market strategists continue to update their views and insights in anticipation of better times ahead. Most strategists are shifting towards the view it is probably time for investors to add more risk to their portfolios as defensives have become a rather crowded space, but few are willing to predict a radical change in the overall environment anytime soon. The stockbroker I mentioned previously also believes the general reluctance stems from the fact that technical chartists continue talking about ugly looking price action with a bias to more weakness in the short term. While not everyone relies on technical analysis when making investment decisions, and not every chartist is negative on the short term outlook at this juncture, it does add to the general caution this stockbroker suggests.

Meanwhile, news and insights from China remain mixed at best. Property prices are in decline, property developers remain under pressure and authorities are working hard to resolve problems with Local Government Financing Vehicles, commonly referred to as LGFVs. Analysts don't seem to think there's a quick solution in the making for Chinese local government debt issues, but they do believe the situation remains manageable and Chinese efforts to date seem genuine. Analysts at BA-Merrill Lynch commented this week that solving debt issues with LGFVs will require more time and until the market sees a clear resolution, they expect Chinese bank shares and the overall Chinese equities market to remain under pressure.

Quant analysts at Macquarie suggest December-January might prove to be the best time for investors to get set for a turn towards a more favourable environment for equities. At Citi, on the other hand, the suggestion was made it may take another six months before commodity prices will be ready to resume moving upwards. Citi strategists thus suggest a rotation into the riskier cyclical industrials stocks continues to make sense, but seeking more risk through adding resources stocks might yet be too early.

In line with this assessment, Citi strategists added Qantas ((QAN)), Fairfax Media ((FXJ)) and Myer ((MYR)) to their model portfolio this week, while removing Newcrest ((NCM)), Commonwealth Property Office ((CPA)) and David Jones ((DJS)).

Probably no surprise then, analysts at Credit Suisse believe investors' attention will soon again be drawn towards Real Estate Investment Trusts (A-REITs) with more than half of the ASX300 A-REITs going ex-dividend on 22nd December. CS analysts anticipate most dividends will be declared around the 19th of December. If CS's prediction proves correct, these announcements will act as a timely reminder of the yield in the sector which the analysts believe is sustainable.

Commodity analysts at Citi updated their thoughts and price projections this week. No immediate prospect for genuine improvement may seem like a disappointment in light of notable improvements in China and the US, but Citi analysts left most of their 12 month price projections unchanged and even lifted those for nickel and tin. Talk about something different! Citi analysts believe the recent sell-offs have removed the froth from the sector, and while additional short term weakness is seen as likely, on a twelve month horizon things have started to look more promising, argue the analysts.

More encouraging news came from Citi's equity strategists in the US who believe that equities in developed countries may well experience a second Lost Decade due to ongoing deleveraging, but this does not automatically mean investors should fear a Japanese experience, assure the strategists. As long as central banks can retain "inflation" (as opposed to deflation) and companies can sufficiently adapt to continue growing earnings per share, this should not automatically translate in dismal returns for investors. History shows, conclude these strategists, those companies that can successfully adjust during challenging times should do well as an investment too. Taking an international view, the strategists line up names such as IBM, HSBC, BASF, Amgen, Anheuser-Busch Inbev and Fanuc as potential candidates that should still perform well in case of another Lost Decade ahead.

While Europe is about to sink in recession, and the UK should soon follow next, economists at RBS point out things have started to look more promising for manufacturers in China and in the US. While note getting overly excited about this yet, certainly with "Europe" continuing to hang over financial markets, RBS does believe global manufacturing ex-Europe may be near an inflection point, and one for the better, not for the worse. RBS strategists in Hong Kong report there appears to be a positive correlation between M2 money growth in the US and the subsequent price action for risk assets.

Recent data show M2 money grew in July and August in the US at a pace exceeding similar spikes at the time of the Lehman Brothers collapse and 9/11. Unfortunately, research conducted by the Hong Kong economists also suggests a positive correlation with inflation in the year ahead, and that would be not such a positive.

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