Don't sell!! - Seven reasons to remain positive on Equities.

1) Macro outlook
We still believe that 2010 GDP growth will come in close to 4% globally and 3% in the US. The latest ISM report supports this view, with the headline index, at 55.7, being in expansion territory (i.e., above 50) for the third consecutive month. The figure is consistent with GDP growth of about 3.1%. We also note that the ISM employment component had the biggest monthly gain since 1983.

Admittedly, the new orders component has fallen for the second month in a row. However, a slowdown in ISM new orders 9 months into a recovery is perfectly normal (and typically lasts 3 months) and in 11 out of the last 15 ISM cycles, ISM new orders has then carried on to make new highs. And on these occasions equities also did well (apart from the 1 month after its initial peak).

2) Earnings
The Q3 results season in the US is close to being the best ever, in spite of revenue expectations for 2009 still being below levels of 3 or 6 months ago.

3) Many credit & macro indicators are at levels they held when equities were 25% higher
Equities have continued to lag credit. When high yield spreads and credit spreads were last at current levels, the S&P 500 was 25% and 30% higher, respectively.

4) Valuation
All our long-term valuation measures show equities to be broadly in line with their longterm averages. -One favoured measure is the equity risk premium. This is currently 4.4% on trend earnings, compared to a long-run average of 3.6%. If we were to input consensus earnings, it is a
much higher 5.5%.

5) Positioning
Retail investors are still cautiously positioned on our data. Money market funds are at 27%
of market cap, compared to a long term average of 19%. Since the start of Q3, retail investors have been net sellers of equities ($4bn), but net buyers of bonds ($166bn) – with $270bn of outflows from money market funds Our model of retail buying of equities (based on the gap between the bond and the earnings yield as well as price momentum) suggests retail should indeed be buying equity.

6) Excess liquidity is close to an all-time high
Excess liquidity – global narrow money minus IP growth - is close to an all time high… it will slow, but excess liquidity tends to be good for financial assets. -According to the IMF, only 26% of announced quantitative easing has yet to be implemented. In the US, there is another $326bn of QE to be implemented, although the Fed have just finished their programme of buying US Treasuries.

7) Tactical indicators
The equity sentiment indicator (based on VIX, put/call, skew, inflows into aggressive growth funds) is high, but not as high as in 2003/4. Historically, the S&P 500 has performed well after the equity sentiment indicator hit current levels.


A Side Note: Focus on high dividend yield with positive earnings momentum.
High dividend yield was the best performing style in the first 18 months of the last bull market. The earnings momentum style has recently started to outperform, after underperforming between the March market low and September (just as it did in the first 5 months of the last bull market) and the style looks abnormally cheap.

(Above mentioned courtesy of C Suisse Global Equity research report - Nov 3, 09)