Company valuations are not yet attractive enough for investors to buy the dip, experts have warned.
In a research note published yesterday (June 13), investment and portfolio analysts at BlackRock outlined the reasons why they are “neutral” on equities on a six to 12-month horizon.
Firstly, they said, the impact of rising energy prices has not been reflected in consensus earnings estimates.
Analysts expect S&P 500 companies to increase profits by 10.5 per cent, Refinitiv data shows.
“That’s way too optimistic, in our view,” BlackRock said.
Given the cross-currents in markets and the economy, the short-term [outlook] is foggyRuffer Investment Trust“Stocks could slide further if margin pressures increase.”
Once the lower earnings outlook has been accounted for, valuations have not improved all that much despite cheaper equities, they said.
Finally, the note warned that there is a “growing risk” that the Federal Reserve raises interest rates too much, or that at least the market thinks it will.
“We don’t see a sustained rally [in the stock market] until the Fed explicitly acknowledges the high costs to growth and jobs if it raises rates too high.
“That would be a signal to us to turn positive on equities again tactically.”
Market slumps
US and UK stock markets have slumped in recent days as tighter central bank policy has spooked global investors, raising the prospect of cheap equities.
The S&P 500 has dropped 9.88 per cent since last Tuesday (June 7), the FTSE is down 5.2 per cent in the same period, and the DAX is down 7.8 per cent.
The S&P is now in bear market territory, sitting 21 per cent lower than at the start of the year.
Ruffer warning
In its monthly report issued yesterday (June 13), the Ruffer Investment Company’s managers also warned against “buying the dip”.
Despite the Nasdaq sitting 29 per cent lower than its high in November last year, Duncan MacInnes and Hamish Baillie said they have only “nibbled on equities” in the pursuit of portfolio balance.
“The bear market is only beginning to grizzle,” they said, adding that the FTSE All-World Total Return is down only 6 per cent this year.
“Given the cross-currents in markets and the economy, the short-term [outlook] is foggy.
“We must not lose sight of the long-term inflationary dynamics that continue to build and risk eviscerating savers.”
The pair also warned against the long-dated inflation-linked bond market, highlighting that the 2073 index-linked bond is down 54 per cent from its November 2021 high, falling 22 per cent in May alone.
“We have long called these assets the ‘crown jewels’ due to our conviction that they should provide the perfect protection against the world of financial repression we are entering,” they said.
Although this remains the case, the pair added, the sensitivity to rising rates has now been felt.
“This illustrates the distinction we have been labouring; investing for inflation and investing for inflation volatility are not the same thing and conflating the two will be costly.
“Mr Market will make us crawl through fire for the gift of redemption and derivative protection via the unconventional toolkit remains essential to navigate choppy and dangerous markets.”
Inflation-linked bonds are now back to pre-Brexit prices, they said, and yet in their assessment the likelihood and proximity of the inflationary denouement is much greater.
“We believe they offer exceptional asymmetry and we have been buying.”
sally.hickey@ft.com
