An extract of the August 2008 edition of Investment Strategy:
Technical rebound in equities fizzles out
After a disastrous first two weeks of July for equity markets during which share prices fell below their previous lows of March in response to new concerns about the financial system (and about Fannie Mae and Freddie Mac in particular), a limited rebound began to take shape. However, the support that US officials have given to the two government-sponsored mortgage lenders does not seem to have completely reassured investors. Although quarterly results were higher than expected, news about the financial system, particularly in the US, continues to be mixed (with more regional mortgage lenders going bankrupt and announcements of new asset write-downs and capital-raising efforts) and economic activity across the world continues to weaken or disappoint. This economic environment explains why the outlook continues to fluctuate and why equity markets remain volatile.
Tactical positioning in equities
Near-term technical and sentiment indicators, lower oil prices and the neutral stances of central banks suggest that the increase in share prices observed since mid-July could continue. Not for very long however, since weaker economic conditions will dim earnings prospects over the coming quarters.
Equity indices have already largely priced in the expected slowdown in growth and earnings and their valuations are currently low. But investors have two more things to worry about, namely the soundness of the financial system and the price of crude oil. Regarding this first point, investors continue to be somewhat wary despite the most recent and very commendable efforts of US authorities to avoid a systemic crisis. Regarding oil and other commodity prices, speculation has made it difficult to interpret recent price trends. With real interest rates still very low and even negative it seems unlikely that oil prices will continue to fall as rapidly as they have, which has certainly been a key factor in the strengthening of equity markets. [ ... ]
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“Investment Strategy”sets forth the different asset allocation choices which are implemented in BNP Paribas Asset Management's portfolios. The investment strategy derives from a running analysis of numerous factors (i.e. the general economic situation, earnings growth rates and financial ratios, assessment of market valuations, technical analysis).