Pessimism currently grips global equity markets, but positive global earnings data suggests investors should be more optimistic about the second half of 2016, says Morphic Asset Management.
In its half-year report, Morphic AM said it is “hard to overstate the pessimism that pervades market participants at the half-way point of 2016”.
“Clients, fellow fund managers, and market commentators seem overwhelmingly to believe we stand on the verge of a bear market,” said Morphic.
Indeed, there is much to be worried about, said the report: Brexit, a Chinese hard landing after years of “unsustainable debt funded growth”, and the increasing risk of implosion in Europe (particularly when it comes to Italy’s banks).
“Brexit may be a recent game changer, but when we look at the economic data, a more nuanced view of the world than that portrayed by the commentariat emerges,” said Morphic.
First, the USA ISM Manufacturing Survey has returned to the expansionary levels of 2013 and 2014, the report noted.
Second, global earnings data shows that analysts’ earnings revisions have turned up (pre-Brexit) across the world.
“This is the aggregated hard data of what is happening in the world, not the opinion of a few market participants,” Morphic said. “And it matters because, to quote the Merrill Lynch report from which this chart is taken: ‘According to history, when the ratio is rising and close to this level, the MSCI ACWI has returned 8.3 per cent in the subsequent 12 months, on average’."
Morphic is, on the whole, bullish about global equities – despite the fact that companies continue to buy back their own stock at an “astonishing rate”.
“Whatever your view on the merit of companies investing in their own stock rather than growing their productive capacity, with limited sellers and a keen buyer, the market clears at a higher price,” the report stated.
“Our expectation for the second half is that markets, led by the USA, will break to new highs, confounding most participants.”