Analysts see signs stock prices may be on the rise despite current pessimism

Investor expectations for stockprice gains have fallen to their lowest level since 2012, which suggests they’re fearful of a recession or another crisis.

Macquarie Capital Markets strategist David Doyle thinks the current environment is similar to what investors saw during the Taper Tantrum in June 2013, the Ebola scare in October 2014, and the U. S. recession fears that surfaced in January this year, which could be good news.

He noted that stocks rose about five per cent in the three months that followed the point when the equity risk premium peaked during these periods, and roughly 10 per cent in a six- month period.

Doyle’s view that equities are a good buy at current levels is also based on heightened volatility. He estimates that the rapid gains seen in the past six months have only occurred five times in 25 years.

The strategist pointed out that other than in October 2008, the S& P 500 has risen an average of five, 10 and 16 per cent respectively on a three-, six- and 12- month basis following such volatility bursts.

“We believe a similar outcome is likely near- term as confidence should soon increase over China’s growth outlook, the durability of the U. S. expansion, and the appropriateness of 2015 FOMC liftoff,” Doyle said.

He noted “extreme pessimism and volatility” have weighed on investor risk appetite over the past several weeks, evidenced by the spike in the equity risk premium.

This measure of the excess return stocks provide above risk- free rates such as the return on treasury bonds has surged to nearly 100 basis points. That’s the highest level other than the 2008- 09, 2010, and 2011- 12 crisis periods.

China is one reason for investor pessimism, but Macquarie economist Larry Hu thinks a hard landing is already almost priced into the market, with credit growth, property sales and infrastructure spending all pointing to a recovery.

Doyle highlighted Crescent Point Energy Corp., Surge Energy Inc., Torc Oil and Gas Ltd. and HudBay Minerals Inc. as names that could benefit from renewed confidence about China.

The firm also believes it is unlikely that foreign activity will derail strength in the U. S. economy, as real consumer spending is up almost four per cent in the past six months, private- sector credit growth has risen nearly five per cent on an annual basis.