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Latest News
What is happening?
Better than expected Q2 numbers
The last four weeks the equity markets have shown a strong bull run after a hesitating June. We at Nordic Invest believe that the prime trigger for this bull run have been in general better than expected Q2 results from companies around the world reporting during the last months. The second contributor to the run has been the still abnormal amount of cash we described in the newsletter from July. From the bottom reached in March 9th private investors primarily lifted the first period, we believe. Institutional investors has so far awaited more evidence of that the worst was over. That came to some extent with the release of the second quarter results. However institutional investors are still loaded with too much cash when looking at a more balanced composition of cash, bonds and equities. We believe that "normalization" will continue during the autumn of 2009 and that is the reason why Nordic Invest is advising its clients to continue to be over weighted towards equities.
What is happening?
Interesting research from data on the American stock market documents that in periods where companies are showing nice earnings reports with growth in earnings per share of over 20% the stocks has only delivered a return of 2% p.a. This research covers data from back to the beginning of the 1920’ies.
Performing the most when dropping!
Historically equities have done the best when earnings have dropped between 10% and 25% compared to the previous year. In these periods stocks have delivered a return of 26% p.a. The conclusion is that one needs to buy stocks at the bottom of a business cycle not at the top! Why is this so? At the top of an economic cycle orders are coming smoothly and the earnings growth is high. Is this a surprise to anyone? Probably not. The news flow is goods in papers and elsewhere and investors/analyst are discounting this to infinity. However the stock market has already discounted this to a wide extend. At the top of a business cycle the performance of equities stops for the simple reason that every one has already bought!
Currently we are in the total opposite situation. Analysts currently estimate earnings for American companies will drop 21% for the present quarter. A lot of investors are still sceptical and has already sold their stocks. The financial and monetary policy is extremely eased and there is a lot of free capacity among the companies. The monetary policy will probably stay eased for a long time which makes alternative placements in cash/bonds less attractive. This scenario has triggered Nordic Invest to turn much more bullish on equities during the spring 2009.
Conclusion: Ahead of the curve
Looking historically the clear patterns are evident: Equities typically starts to perform 3–4 month before a recession ends and 6–9 months before the earnings in the companies starts to grow again. We believe the coming macro economic data will actually show that the recession has already ended in USA. The equities react a long time before the hard economic facts. The strong gains normally come early while the economic fundament and confidence is still fragile. Nordic Invest believes this fundament and confidence among investors will strengthen further during the autumn of 2009.