Robert Buckland is Citi’s U.K.-based global equity strategist and his “Five Questions, Five Answers” report released Wednesday provides interesting and pertinent reading. Mr. Buckland, like most Citi strategists and economists, is bearish and this is important context. In distilling investor concerns into five questions and answers, however, the report presents important perspective for both optimistic and pessimistic investors.
The first question, “Is the bear market done?”, is answered with a blunt ‘not yet’. The strategist doesn’t believe that central bank efforts to prop up national economies will be enough to offset the 50 per cent drop in global corporate profits he expects.
The second question concerns the attractiveness of stock valuations and here, too, he is skeptical. The current Cyclically Adjusted Price to Earnings ratio [CAPE] for global stocks is not compelling at 21 times, slightly above the long term average.
In answer to ‘What indicators are you watching?” Mr. Buckland discusses how he’s gauging when a sustainable recovery will begin. As it happens, the indicators are the same ones I’m focusing on – global purchasing managers indices (PMIs), infection data, analyst earnings revisions and corporate bond spreads.
What will the recovery look like? The strategist does believe in a sharp, V-shaped recovery for markets – although at a later date than market bulls. He believes the rally, when it comes, will be led by cyclical stocks like energy and financials.
Mr. Buckland is frequently asked for the market signals arising from his bear market checklist. He’s bearish, but admits the message from the checklist is ‘buy the dip’.
The full checklist, which I posted on social media here, includes 18 recession indicators. Currently, only 5.5 of the indicators are flashing red, far fewer than in 2007 when 13 measures were indicating imminent recession. The strategist emphasizes, however, that the checklist is not a great market timing tool.
The focus on PMI indices means Mr. Buckland will likely be busy on Thursday as preliminary results for Australia, Japan, France, Germany, Euro Area, U.K. and U.S. will be released.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown (for subscribers)
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