FYI | Jun 12 2008
By Chris Shaw
As the market is currently demonstrating there remain a number of risks to any recovery in global share prices over the second half of 2008 and Standard & Poor’s has acknowledged this by reducing its year-end target for the S&P500 Index in the US to 1490 from 1560 previously.
The achievement of the group’s revised target would still see the market gain a little over 8% net between now and the end of the year, while it would also mean the market will ultimately book a slight gain over the full calendar year.
There are a few reasons supporting the group’s view, including that a number of its positive forecasts for the economy and share price drivers remain in place. As an example the expectation now is for US GDP to register positive numbers in all four quarters of the year, which compares to a previous assessment of two negative quarters followed by two positive ones.
GDP growth is tipped to strengthen over the course of the second half of the year as the government’s tax rebates flow through into increased expenditure and as the full impact of the cuts to official interest rates work their way through the economy as a whole.
As well the group’s analysts expect operating earnings among US companies are likely to recover in the second half of the year across all ten sectors of the Index, which would signal a turnaround in the financial and consumer discretionary sectors in particular given their recent weakness.
Valuations are also supportive according to the group’s Investment Policy Committee as at an Index level of 1385 the 12-month trailing P/E (price to earnings ratio) is 16.5x, which represents a 15% discount to the average P/E for the Index since 1988.
Headwinds for the market include increased inflationary pressures in the US economy and higher oil prices, while the Investment Policy Committee also notes analysts in the US have been steadily scaling back their estimates of earnings growth for 2008 for stocks in the S&P500 Index to around 8% now from 16% earlier this year.
In terms of asset allocation the Policy Committee has not changed its views, continuing to recommend a neutral weighting on both US and international equities, a negative weighting towards bonds and a positive weighting on cash.
