Investment Strategies

Now Is Likely Turning Point For Equities - Collins Stewart Wealth Management

Wendy Spires Assistant Editor 7 April 2009

Now Is Likely Turning Point For Equities - Collins Stewart Wealth Management

Equity markets have become mispriced and oversold in the view of Collins Stewart Wealth Management, and in the expectation that markets will soon correct towards fair value, the firm is positioning for a rally.

In looking to a equities rally Collins Stewart is consciously taking a strategic approach towards asset allocation, on the basis that most academic literature on market timing suggests that a strategic, rather than overly tactical asset allocation decisions will provide the superior return.

“Making overly tactical asset allocation decisions in markets such as these increases the possibility of being whipsawed in the wrong direction,” said Nigel Cuming, chief investment officer at Collins Stewart Wealth Management.

“In our view markets are going through a volatile bottoming process that, once completed, will most likely be followed by a meaningful equity rally, in which the upside could prove every bit as spectacular as the fall. While we are confident that equity markets will recover, however, the timing of these moves is difficult, hence the strategic approach that we have adopted,” he said.

Mr Cuming notes that the equity response to the credit crisis has been extraordinary - with the S&P 500 having fallen over 56 per cent from peak - and it is clear that equity markets are pricing in a an extremely severe economic slowdown. What the markets are doing, according to Mr Cuming, is declaring the credit crunch far worse than any economic adjustment since the Great Depression, and that in his view is not justified.

Collins Stewart anticipates that, if consensus growth expectations are correct, the US will pull out of recession in the third quarter of this year. With this in mind, the firm believes that the likely turning point for equities is about now.

Markets have always adjusted quickly following recession, Collins Stewart maintains, and therefore the firm remains strategically invested in the belief that any equity market rally will prove difficult to chase for those who are not already positioned for it. According to Mr Cuming, since 1900, 25 per cent of the first year’s returns have been made in the first 10 days of recovery, and 50 per cent of the first year’s returns are made within two months.

Collins Stewart anticipates that the global authorities will continue to take whatever fiscal and monetary action is necessary to bring about a recovery and that confidence will soon return to markets.

“Equity markets will continue to build a volatile bottom, which should provide the foundations of a decent market rally. More positive sentiment and risk appetite will soon return, and if past experience serves us correctly, ahead of any economic green shoots. Patience will be required and, ultimately, rewarded,” said Mr Cuming.

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