The latest rebound in US equities is probably too early to do a victory lap though there’s no denying that valuations have improved pretty dramatically in the last couple of weeks, said David Lafferty, Chief Market Strategist at Natixis Global Asset Management.
With the S&P 500 trading at about 18 times forward earnings and the Dow at about 16.5/17 times, the market is surely not dirt cheap. But global quantitative easing over the last three to four years has made everything pretty expensive and this sell-off has helped a lot in getting investors back into the markets, he noted.
Asked where investors should seek value now if valuations are not “dirt-cheap”, David said this may not be the best time to bottom-fish since he’s a little longer on outlook. Natixis’ view across sectors hasn’t changed much and there are two sectors where there could be good value.
Financials, particularly banks, are looking good as earnings power is likely to improve with a pick up in loan demand. Also, valuations of banks have been pressured out there because there’s sort of a view that banks would never get out from under the additional regulations.
But that’s an incorrect way of looking at the banking sector, because they are pretty much getting used to living in such an environment. The big money center banks now probably trade at 10 times earnings and in the long run they would probably rise to 12 or 13, i.e. closer to market multiples, which make them pretty cheap now. Natixis also thinks there’s opportunity in the technology sector, both old-tech and new-tech, he observed.
Despite the market rallying in the last couple of days, the Volatility Index (VIX) remains at an elevated level. Asked what that portends for the market, David said it probably means the scare from China is not completely gone.
Given the spike in VIX from below 13 to up north 40 a couple of days ago clearly puts fear into the market. The small drop in VIX shows the fear has somewhat come off, but the worries about China in the long-run have certainly not gone away.
Natixis has been generally optimistic about the equity market, but it doesn’t think it’s a run-away bull market. If China’s GDP growth slows from 7 percent to 5.5-6 percent, investors can still make money in global equity markets. However, if Chinese growth rate falls to 3-4 percent, then investors should get used to such high volatility levels, because the US would struggle if China slows down at such a fast clip, he concluded.
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