National Post

Investors should buy next dip, analyst says

- Jonathan Ratner Financial Post jratner@ postmedia. com

Global equity valuations appear stretched, but they don’t look that bad when compared to bonds, and considerin­g the fact that 2017 should see healthy earnings growth for all major markets.

The MSCI All Country World Index posted a sevenper- cent return in the first quarter, as all sectors were in positive territory, outside of commoditie­s.

Much of the optimism from investors stems from the earnings outlook, as global growth continues to gain traction — albeit slowly — along with commodity prices.

Strategist­s at Citigroup forecast 10- per- cent global EPS growth in 2017, up from a two-per-cent gain in 2016.

Bottom-up estimates from analysts are even more promising, with consensus pointing to a 14-per-cent improvemen­t in global EPS this year.

“That’s closer than what we normally see at this time of year,” said Citigroup strategist Robert Buckland. “For once, bottom- up optimism may be justified.”

He noted that the synchroniz­ed upturn in earn- ings is the first such move since 2010, and it marks a major shift from recent years, when regions and countries moved in and out of EPS recessions.

Energ y and materi - als stocks are expected to demonstrat­e the strongest growth, followed by other cyclicals, and defensive sectors are expected to lag.

Citigroup is forecastin­g 18- per- cent EPS growth for cyclical sectors in 2017 ( 12 per cent excluding commoditie­s), and just five- per- cent growth for defensives.

Another promising sign is the low likelihood of significan­t analyst downgrades, particular­ly when compared to 2015 and 2016.

On a global basis, all cyclicals have been benefiting from EPS upgrades, while the majority of defensives have encountere­d downward revisions — a trend that hasn’t been seen since 2011.

Buckland pointed to Citigroup’s Bear Market Checklist, which compares current market variables to those preceding major downturns. Only three of 18 factors are pointing to sell.

“Our checklist helped us hold our nerve in 2011-12. It told us to do the same during sharp correction­s in August 2015 and early 2016,” Buckland said. “Right now, it is telling us to buy the next dip.”

So while valuations appear less frothy than before previous bear markets, other promising signs are reasonable levels for global dividends yield and the Shiller cyclically adjusted P/E ratio.

At the same time, bond yields are elevated when compared to this time last year, and with the U. S. yield curve currently sloping upward, this rather accurate predictor of U.S. recessions is not flashing a warning sign.

The upcoming Q1 2017 earnings season will be critical for the market’s momentum, with EPS growth for S&P 500 companies currently expected to be 10.2 per cent.

Financials and technology should lead the way, with analysts forecastin­g doubledigi­t gains, coupled with a strong rebound in both energy and materials.

“We continue to expect upward revisions as earni ngs season progresses,” said Tony Dwyer, U. S. equity s t rategist at Canaccord Genuity.

He noted that the upward revision of 3.4 per cent between the start of reporting season to the final figures, suggests a final read closer to 14 per cent for the first quarter.

“We are looking to get more aggressive, especially given the ‘ offensive’ sector relative under- performanc­e since our market downgrade last December,” Dwyer said.

He recommende­d that investors position themselves to capitalize on any fearbased weakness in stocks.

 ?? RICHARD DREW / THE ASSOCIATED PRESS ?? Trader Edward McCarthy on the floor of the New York Stock Exchange. Citigroup says the next downturn in stocks should be a signal to buy.
RICHARD DREW / THE ASSOCIATED PRESS Trader Edward McCarthy on the floor of the New York Stock Exchange. Citigroup says the next downturn in stocks should be a signal to buy.

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