Last month's stockmarket slump was just a correction, and equities are still cheap, reports Graeme Evans. There might also be an alternative.
While October signalled a more volatile phase for stockmarkets, UBS has urged investors to think twice before writing off the decade-old bull market.
The Swiss bank has just increased its overweight position in global equities, believing that last month's sharp falls were merely a correction in the context of the ongoing bull market, rather than the start of a bear market.
Chief investment officer Mark Haefele said:
"The MSCI All Country World index is still around 6% below its peak. This creates an opportunity for investors."
At this mature stage of the cycle, he said investors should be prepared for greater volatility and more modest scope for further gains. But this should be no barrier as he expects markets to move higher over a six-month investment horizon.
Haefele noted that valuations still look favourable with the forward price/earnings (PE) multiple of eurozone stocks at roughly 12x compared with the long-term average of 14x.
And, although absolute valuations in the United States are not cheap, on just over 16x forward estimate of earnings, they remain attractive versus bonds.
Economic and earnings data also look supportive, with nearly 80% of S&P 500 companies having beaten analyst estimates in recent third-quarter results. The performance hasn't been so impressive in the eurozone, but there are signs the region is starting to recover.
Haefele added: "The market may also be underestimating the potential for positive surprises.
"Expectations heading into the G20 meeting at the end of November for a trade deal between the US and China are rightly low. But a positive surprise is not impossible."
The crowded trades
UBS has also updated its weekly list of the stocks that are most overweight and underweight by global active fund managers across regions and countries.
The top 10 crowded trades list informs investors of the stocks in danger of a swift reversal in fortunes if negative news causes a rush for the exit.
Source: TradingView (*) Past performance is not a guide to future performance
A swing to value stocks
The shifting trends in stockmarkets also mean fund managers are likely to be much more interested in value stocks, according to Niall O'Connor, deputy fund manager of Brooks Macdonald Defensive Capital.
With less incentive to take risk in equity markets now that investors can get a real yield on cash, he predicts that value stocks will outperform growth stocks for the first time in many years.
Yields on US Treasuries are now ahead of US inflation, which O'Connor said signals the death of the T.I.N.A era (There Is No Alternative to equities), whereby quantitative easing meant inflation eroded the value of holding cash.
As a result of this changing picture, Brooks Macdonald has increased cash levels to 10%, which is close to its highest ever.
*Horizontal lines on charts represent levels of previous technical support and resistance. Red line represents down trend since June 2017.
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