Citigroup says investors should not be perturbed by massive gains in stock indexes since the 2008 financial crisis because valuations of listed companies and banks are backed up by a solid stream of profits.
While global stocks are no longer cheap following years of low interest rates, they are reasonably priced, the bank said.
For that reason, Citi’s chief global equity strategist, Robert Buckland, is advising his clients to buy more stocks around the world, especially those of financial services firms, which he believes have yet to fully recover from the meltdown of 2008, of which they were at the centre. These stocks might outperform global indexes in the next 12 months as economies improve and central banks start to raise interest rates, he said.
“The market should be able to digest that but because earnings are coming through, quantitative easing is telling you that the Fed has done its job,” Mr Buckland said. “There’s a negative impact because of the withdrawal of liquidity but there’s a positive story because they are taking it away because the economy is getting back on its feet and profitability is coming through. We think the better fundamentals should just about offset the withdrawing of liquidity from the market.
“Investors would say the gain is about cheap money flooding the markets, and I think it is important. But it is also a begrudging acceptance by the financial markets that the world is not going to collapse in another year.”
The MSCI All World Index, a benchmark measure of global equities, has almost doubled since the global markets collapsed in 2008-09. A large part of that growth has come from the US, the world’s biggest economy. Since the crash, the S&P 500 index alone has more than doubled in value.
The rally in equity markets has been driven by hundreds of billions of dollars in financial stimulus from the US Federal Reserve, which has pumped money into bonds while keeping interest rates near zero per cent to stimulate economic growth.
Citigroup expects the biggest gains on global equity markets by mid-2015 in the UK, Japan and Asia, where benchmark indexes may gain 12 to 13 per cent. As a whole, global equity markets are expected to advance 9 per cent by mid-2015, Citi said. In emerging markets, a class which include the UAE, the bank is bullish on China, Turkey and Taiwan among others.
“Sentiment towards emerging markets has improved year to date, from dire to approaching neutral,” said Mr Buckland. “Few investors, however, are genuinely convinced about the virtues of the asset class. The top markets based on attractive valuations are Taiwan, South Africa and China. Least attractive are Mexico, the Philippines, Thailand and Mexico.”
mkassem@thenational.ae
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