Capitulation at equity markets? European equity markets keep being much cheaper than US markets

After three days of rising markets we see a consolidation today. One open point is if we have seen capitulation and a bottom? Both questions cannot be answered with certainty but there are some hints about the possible answer.

Fig. 1: Cash is the king of the moment

While we see massive inflows into cash the flip side is outflows in equities. The volume has spike at the US stock exchange. But it is still open if this was the final selloff and we have seen a capitulation. BoAM sees some signs of capitulation.

Fig. 2: The BoAM indicator supports the capitulation thesis

But based on Price to book the US market is still expensive and far away from a bottom.

Fig 3:  Price to book in Europe and S&P 500

Europe measured by the price to book ratio of the Stoxx Europe 600 is at extreme low levels. But those who follow us, know that I keep repeating it is cheap for a reason. And I might add it will unfortunately stay cheap. If you are interested in cheap assets buy Asian bonds and equities. As we have written in our last publication Chinese equity markets have not had a bear market.

Fig. 4: Nordea raises the point that it could take a long time to deflate US PB ratio

Please note that from 2004 to 2008 equity markets did rise and PB decreased. Therefore, it does not necessarily mean that we must go much lower in the S&P 500, but we can definitively not make a US value case.

Another point is US earnings revisions. Currently PE ratios are at around 13.5 times for US equities. But so far, most contraction was price driven.

The earnings revision cycle will full kick in once Q1 results will be presented, i.e. around in 2 weeks from now.

From this angle there is still downside risk.

Fig. 5: US earnings revision will most likely accelerate in the coming weeks

Fig 6: From a technical standpoint the S&P 500 needs to test its lows

Therefore, we keep arguing this is a bear market rally. But from a portfolio construction point stay invested and add during weakness some additional money to lower your average cost price. I would recommend doing this in at least 3 waves and not to deploy all at once.

Fig. 7: Chinese Real Estate market is recovering

Selectively bonds from Chinese property manager might over some attractive entrance points. Given that they trade at low prices. The key risk for China is a 2^nd outbreak of the virus.

UBS CIO office reckons that in Europe we might see a peak in new infected people in mid-April and in mid-May we might get rid of some restrictions. I would say that this is a possible scenario assuming that all measures will be effective. If that would happen, we were now at interesting buying levels. Nevertheless, epidemiological experts are less optimistic about the end of the crisis.

Published: 27/03/20 by Blackfort CIO Dr. Andreas Bickel

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