Wider correction in stocks unlikely, says strategist

The main ingredient missing from stock markets right now is confidence, and savvy investors must hold their nerve, according to a strategist.

The recent pick-up in volatility brought back daily moves of more than 1% in some indices, and this is something markets had grown unaccustomed to. Equities saw heavy outflows last week.

But this should have hardly come as a surprise to investors, Chris Tinker, co-founding partner at Libra Investment Services, pointed out in recent research.

“We would continue to point to the likelihood of a wider or more sustained correction as remaining low: traditionally major market downturns are a function of either (the reality of) economic recession or financial sector distress and even though conditions are not great, neither would appear to be a high probability right now,” he wrote in recent research.

Libra estimates fair value (FV) for stock prices by taking into account companies’ sales, cash flow, earnings before interest, tax, depreciation and amortisation (EBITDA), earnings and book value. It also looks at whether shares trade at a discount or premium to their fair value.

The model shows that, for Europe in particular, fair value growth has plunged and cyclical stocks are in decline from a value perspective. This “certainly sends through warnings shots” but it was priced in the market already, Libra’s analysis shows.

“Valuations are close to their lows everywhere, with only sectors with positive FV trends — healthcare and IT — remaining positive in terms of valuation,” Tinker said.

Looking at the discount to fair value, all sectors look cheap.

Stocks trade at a discount to fair value

Fair value discount shows stocks are cheap. Source: Libra Investment Services

With geopolitical tensions rising, downgrades of growth prospects by the International Monetary Fund (IMF), a string of bad data out of the eurozone’s biggest economy Germany and the Federal Reserve’s quantitative easing ending this month, investors have been voting with their feet since the start of the third quarter.

Tinker acknowledged that markets are “uneasy” but added that it was hard to argue they were mispricing the risks.

Third-quarter earnings are due to be released, and “while we may be facing ongoing growth concerns, we are not doing so from a position of naïve optimism,” Tinker wrote in his most recent research.

“In fact, Q3 revenue and earnings growth figures are as likely to surprise to the upside as the downside over the coming weeks so at this point it is arguably a case of holding ones nerve in global equities and trusting to the data,” he added.


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