Analysts Boost Developed Stocks Most Since 2009
Analysts are favoring stocks in developed countries over their emerging market rivals by the most since 2009, betting their global reach will provide a cushion during a weakening recovery.
Securities firms have boosted average rankings in the 24- country MSCI World Index (MXWD) of advanced nations during the second quarter after cutting recommendations worldwide for seven months, according to data compiled by Bloomberg from more than 62,000 ratings. They lowered developing countries during the period, in which $6.3 trillion was erased from global equities.
Preferences are shifting to countries less reliant on mining and energy production, according to Keith Wirtz, who oversees $15 billion as chief investment officer for Fifth Third Asset Management. Equities in emerging nations, whose markets derive about 25 percent of their value from commodity producers, slumped three times as much in 2011 as their developed counterparts, which get a third less value from metal, fuel and chemical suppliers, data compiled by Bloomberg show.
“When there’s a tone of risk avoidance, the developed markets represent quality and less risk than the emerging markets,” Wirtz said in a telephone interview yesterday. “You have established companies, they’re large, multinational. They’re not pure plays on the regions that are slowing down.”
The average rating for stocks in advanced economies has risen this quarter to 3.68 from 3.64, using a scale in which 5 is the strongest buy and 1 the strongest sell, data compiled by Bloomberg show. For emerging markets, the mean recommendation slipped to 3.74 from 3.78.
Because they comprise thousands of analyst recommendations, changes in the levels take years. The average for advanced countries has stayed between 3.843 and 3.635 since 2010 for advanced countries and 3.731 to 3.868 for emerging, data show.
Definitions of buy, sell and hold vary by country, making the direction of revisions a better indicator of sentiment than the absolute level, said Eric Teal, chief investment officer at First Citizens Bancshares, which manages $4.5 billion in Raleigh, North Carolina.
“The initial shifts and changes in sentiment are the most important thing,” Teal said. “Especially since so many have been bullish on emerging markets in the past.”
Concern Europe’s debt crisis will spur another global recession sent the MSCI All-Country World Index down 9.3 percent in May, the most since it fell 9.7 percent in September. Developed nations in the index lost 9 percent that month and 9.8 percent this quarter, while emerging markets decreased 12 percent and 13 percent, respectively.
Global equities slipped last week, driving the MSCI All- Country World Index to the lowest level since December, as costs to protect Spanish government debt with default swaps reached a record and U.S. employers added the fewest jobs in a year. The gauge of stocks in 45 countries erased its gain for the year after it rose as much as 13 percent through March 19.
Concern the global recovery is slowing has pushed equities in Brazil, Russia and Italy (FTSEMIB) into bear markets, defined as a decline of 20 percent or more from a recent high. Spain’s IBEX Index has lost 42 percent since peaking in February 2011, while Greece’s Athens Stock Exchange General Index (ASE) has plunged 91 percent since October 2007, Bloomberg data show.
The biggest improvements in developed equity ratings this quarter were in Italy, Finland and Sweden, data compiled by Bloomberg show. Stock recommendations last climbed this much in developed relative to emerging markets in the fourth quarter of 2009. Developed countries outperformed emerging markets by 8.6 percentage points in the two years following that quarter.
Average ratings for developed markets had slipped for five straight quarters during the financial crisis of 2008.
British American Tobacco Plc (BATS), Europe’s largest cigarette maker, had its average rating raised 0.23 point since March to 3.88. Analysts increased recommendations on technology services company CGI Group Inc. in Montreal to 4.44 by the end of May from 4.2 two months earlier, data compiled by Bloomberg show. Both are beating their country benchmarks so far this quarter.
Analysts boosted Helsinki-based Ramirent Oyj (RMR1V), which rents out equipment including scissor lifts and tower cranes, almost a full point to 4.08. The company boosted profit margins at its Norwegian unit more than sevenfold during the first quarter.
The upgrades are partly a reflection of analysts growing too bearish earlier in the year, according to Tim Hoyle, the director of research at Radnor, Pennsylvania-based Haverford Trust Co., which manages $6 billion. The average rating for companies in developed countries slipped 0.21 point in the previous two quarters, the biggest drop since the bull market started in March 2009, Bloomberg data show.
After rising 8.2 percent to start 2011 and reaching an almost three-year high of 357.72 on May 2, the MSCI All-Country Index fell almost 24 percent to 272.08 on Oct. 4 after S&P stripped the U.S. of its AAA credit rating, Congress and the administration of President Barack Obama struggled over deficit cuts and Europe was forced to bail out Greece.
“Expectations for developed markets have been low for some time,” Hoyle said on May 30. That ratings are falling in developing countries “seems to me to be the realization that ‘de-coupling’ is a fantasy word,” he said.
The reversal in analyst predictions hasn’t spared equity investors losses.
Tesoro Corp. (TSO), a refiner based in San Antonio, Texas, and Richardson, Texas-based Fossil (FOSL) Inc., a seller of watches and accessories, are down at least 9 percentage points more than the Standard & Poor’s 500 Index since the end of March. The losses came even as analysts boosted ratings by more than 0.3 point for each, data compiled through May 31 by Bloomberg show.
The price declines mean Tesoro’s price-earnings ratio is 53 percent cheaper than the S&P 500 and Fossil is trading at 15.7 times earnings, 20 percent below the three-year average, data compiled by Bloomberg show.
“We are more of a global economy so the correlations have certainly become much more than they were a generation ago,” Tom Wirth, who helps manage $1.5 billion as senior investment officer for Chemung Canal Trust Co., based in Elmira, New York, said in a phone interview yesterday. “It doesn’t mean that the local issues that could hamper Spain versus Germany, for instance, are nonexistent, but we are far greater correlated, and that’s to be expected to continue.”
Valuations have fallen around the world since the start of the quarter. Developed nations’ equities trade for 13.7 times earnings, 24 percent below the average multiple since the bull market began in March 2009. For emerging markets, the multiple is 10.8.
Egypt (EGX30), Indonesia and Turkey are among the emerging nations where analyst bearishness has increased the most.
Orascom Construction Industries, Egypt’s biggest publicly traded builder, had its average rating cut to 4.26 by the end of May from 4.37 in April and from the 2012 high of 4.43 in February, data compiled by Bloomberg show. The stock is down 5 percent since March after rallying 29 percent in the first three months of the year, even with earnings falling 25 percent in the fourth quarter.
Securities firms lowered recommendations on Federal Grid Co. (FEES), in Moscow, by 0.52 points to 4.3. The stock has tumbled 40 percent this quarter after a 23 percent loss in 2011. Before that, Russia’s monopoly for high-voltage power transmission lines had tripled in the two years following the 2008 financial crisis. The board last month recommended against paying dividends for 2011 and earnings are forecast for their first decline this year since 2009.
Optimism about the rate of global economic expansion is declining as economists lowered their median estimate to 2.6 percent for 2012, down from 3.4 percent in July, data compiled by Bloomberg show. Emerging economies with greater exposure to the world’s health are less enticing for investors because they’re still fearful of contagion after the financial crisis in 2008, Teal says.
“In a risk-off environment, emerging markets fare worse,” he said. “Investors are starting to look more confidently at the U.S. market, where there’s less exposure to the Europe financial crisis and where the economy seems to be chugging along and staying out of recession territory on its own.”
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