ASSET CLASS: Is It The Bottom, Or Just A Brief Respite?
26 Jul 09:01
By Alen Mattich
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--This week's big Wall Street rally came as a relief after
the sickening slide that markets worldwide have suffered during the past couple
of months.
But does that mean the sun's going to shine again, or was this just a brief
flicker in the gloom?
The broad consensus is that a dramatic low or collapse of confidence is
needed before the market is ready to resume an upward course following a deep
bear market.
"The bottom of any (bear) market is characterized by capitulation," said
Michael O'Sullivan, a strategist at Commerzbank Securities.
Unfortunately, there's no consensus on what this capitulation looks like when
it comes.
There are two major schools of thought: One looks for pandemonium, the other
for post-apocalyptic quiet.
The pandemonium school tends towards the view that the heavy declines of the
past couple of months qualify as capitulation.
"In some respects, we've almost thought we'd seen it," said Peter Cartwright,
an analyst at Williams de Broe, pointing to the 27% fall in the U.K.'s FTSE 100
in the two months to Wednesday.
"There's no standard definition (of capitulation). There are various
indicators - extreme volatility, evidence investors are throwing in the
towel...to some extent we've seen that," said Peter Oppenheimer, strategist at
HSBC.
But he added: "I'm not confident the market's reached a trough yet, though
the main valuation excess has been taken out."
The market has certainly whipsawed. The FTSE 100 traded in a range of less
than 8% from early October last year to early June; these days, 5% intraday
moves aren't unusual.
Whether investors have given up on stocks is less clear. The most recent
Trimtabs mutual fund data from the U.S. showed that redemptions were running at
a faster rate than they had been post-Sept. 11. But the selling still falls
shortof wholesale dumping of stock.
In the U.K., private investors talk of getting out of stocks, but they have
also been slow to do so on a large scale.
"There's considerable concern (on the part of clients) but we haven't had
instructions to liquidate or reduce equity holdings yet," said the head of
private client asset management at a major European investment house.
Sentiment among big investors hasn't been crushed yet either, and the
institutional sector is confident that markets will bounce. The latest Merrill
Lynch survey of fund managers found that about three-quarters were expecting
shares to be higher in a year's time. As a body, they remain heavily invested
in shares - cash balances are at less than 5%, the survey found.
Besides, there's often some climactic event in the financial sector that
defines this explosive finish, says one strategist.
"In any bursting of a major asset price bubble, there's at least one major
financial institution that's taken out in a box," said Stuart Thomson,
strategist at Sutherlands.
Whereas the pandemonium school predicts a big rally following a heavy fall,
post-apocolyptic pundits' expectations are for spooky quiet.
In a recent research report, James Montier, global strategist at Dresdner
Kleinwort Wasserstein, defined the stage marking the end of an asset bubble as
"revulsion."
It's when "people are so badly scarred that they can no longer bring
themselves to participate in the market at all," he said.
At this point, investors would no longer care where the market is.
"Capitulation is when no one's interested in calling a bottom," said Tony
Dye, a well-known value investor and head of hedge fund firm Dye Asset
Management.
That happens when the market goes nowhere for a couple of years, he said.
Which is exactly what happened during the 1970s. Then, says Williams de
Broe's Cartwright, people were so disillusioned with share trading that volumes
dried up.
Most investors agree that considerable value is found when the bottom is
reached, and many are finding it right now.
"It's felt cheap for some while," said Cartwright.
HSBC's Oppenheimer is more cautious. He says some stocks are very cheap, but
there's still no evidence of value in the market overall.
But even when value slaps investors in the face, they won't necessarily be
tempted to buy.
"It'll take a while for investors to feel comfortable," said Colin McLean,
director of Scottish Value Management.
They'll need to have confidence in the earnings numbers that companies are
reporting and to believe that dividends won't be cut - and for that they'll
need to see a track record.
The post-apocalyptic camp doesn't hold out much near-term hope for the
markets. But the pandemonium school isn't convinced it's seen capitulation just
yet. Which suggests the bear isn't dead - just napping.
-By Alen Mattich, Dow Jones Newswires; 44-20-7842-9286;
alen.mattich@dowjones.com
(END) DOW JONES NEWS 07-26-02
09:01 AM |
