Macro data suggests cyclical stocks on a rebound: Expert
Nicholas Ferres of Eastspring Investments says he is watching 1,420 level on the S&P 500 closely. "As a key support level, that was the high in early April which was a previous resistance," he told CNBC-TV18 adding, a break of that to the downside could precipitate a more meaningful correction.
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He believes the macro data suggests cyclical stocks are on a rebound. However, he expects markets to remain in a consolidation mode for a while. "A Mitt Romney victory in the US presidential polls may be read negatively by the markets," he said adding, US corporate profits may fall 50% if the fiscal cliff not addressed.
He remains bullish on mining and commodity plays and underweight equities.
Below is an edited transcript of Ferres's interview on CNBC-TV18.
Q: Are you characterising this as a start or an onset of an October correction? Or could it just have been a one-off sharp cut?
A: I think that is plausible. I am watching the 1,420 level on the S&P 500 quite closely. As a key support level, that was the high in early April which was a previous resistance. It held support there over the last couple of weeks as we are seeing the consolidation post the Ben Bernanke QE announcement. But a break of that to the downside could precipitate a more meaningful correction.
Q: What are the triggers you are looking out for right now which will determine which side we actually breakout in the next few days?
A: Broadly, just judging price itself. Up until last Friday some things were encouraging. So, to some extent we saw a continuation in terms of the price and in terms of the S&P 500. Equally we saw confirmation from asset prices like the euro and sort of stronger treasury yields through most of last week up until Friday.
But what does concern me is the leadership of the tech sector which has started to rollover. Some of the earnings reports out of those key bellwether stocks in the US were quite soft. That, is perhaps a warning sign that too much earnings optimism, particularly in that sector was built into the price.
On the positive side, I think what was happening up until then, was perhaps that the cyclical stocks were actually suggesting rebound. We have seen some confirmation from the underlying macro data. So, we have seen the purchasing managers’ manufacturing surveys improve globally over the last two months and some signs of improvement out of China, in terms of the more partial data, that we watch quite closely.
But I think going into year-end, there is a significant risk of fiscal tightening in the United States next year. And the US Congress does not have very long, post the election to do something about it. So I think that, is a material risk.
Q: Do you see the election outcome itself being a big near-term trend decider for the markets?
A: Possibly not. But I think a Romney victory could plausibly lead to a perversely more disruptive outcome for markets. This is because he said he would change the Federal Reserve Chairman. That may perhaps lead to a less quantitative easing next year, if they change the administration atop the Central Bank.
But I think, the fiscal issue is important simply because the S&P 500 is trading near an all-time high. If the S&P 500 was 20 percent lower, I do not think it would be a material impact and I think on the positive side, large parts of the US economy are showing signs of improvement, particularly in housing. But if there is a meaningful fiscal contraction next year in the US, it is quite plausible that the economy goes into a deep recession in which case, profits could fall 50 percent.
Q: For now your tactical positioning remains to be buying any of these dips in global markets? Or are you watching the price action very closely before making up your mind,. Are you are not that bullishly inclined?
A: I am not really bullishly inclined. We have, over the last few weeks reduced the risk in our clients’ portfolios. We are actually slightly underweight equities going into year end. Offsetting that, we have got some bullish positions.
On August 31 this year, we bought a basket of global mining stocks .We are overweight on Russia which clearly is a mining and commodity index. In equities overall, we have actually got an underweight position.
But going into early next year, if there is a meaningful correction as a result of an episode related to fiscal tightening in the US, or worries about that, it maybe a fantastic buying opportunity, particularly if stock prices come off about 20 percent, which is quite plausible in my view.
Q: What is your sense of what is going on in the commodity space? We have seen some crude and gold turning a bit wobbly on Friday. Any thoughts on those asset classes?
A: To some extent, that probably supports the price action that you are seeing in areas like technology, where there was probably too much optimism priced in.
We saw in a significant selloff in silver, which is probably the most volatile precious metal over the last two weeks, after it broke key support there. What that is suggesting is that too much optimism with regard to quantitative easing, was priced into those sort of assets.
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