Equities, Commodities a Good Bet by Middle-End of Q3

by: Irfan Chaudhry
Investors' natural gut reaction should be capital reservation after yesterday’s bloodbath. We had been recommending the defensive stance since June 2011. However, I don’t support “safety trades” at the current juncture. This is based on our outlook about the level as well as the timing of the current correction’s inflection point (mid to end of Q3 2011). This bloodbath is the result of the negative tilt of economic news which was expected. Meanwhile, the market trades at 11.6x forward earnings and companies will continue to beat the street's estimates. Is the time to buy now? I am prone to taste it now, and I’ll bite if it goes even lower. This was the time for which I said to “keep the dry powder at hand” (U/W equities). Here are some of the factors:
  • Persistent weakness in riskier assets will increase QE III probability with positive implications for equities and commodities. We may expect further delays in EM tightening and some measure of liquidity pumping.
  • 75% of companies have beaten the Q2 earnings estimates. Decline in commodity prices should be good for top line and margins in Q4 2011.
  • The debt ceiling crisis has passed. Euro debt crisis will flare until mid to end Q3 2011, but will be resolved.
  • US household debt obligations (rent, credit card bills, car payments, etc., divided by income) are at lows since 1992.
  • Manufacturing and service sectors are still expanding and the PMIs will start tilting positive from mid to end Q3 2011
  • GDP growth is still expanding although more slowly after the recent revision.
  • Decline in commodity prices is good for disposable income and domestic consumption, which will quickly translate in sales and confidence data.
  • Jobless rate will improve as some indicators like Temps in Ministry of Labor’s latest report - Car sales are up 5.8% YoY.
In the meanwhile, expansionary domestic policies in Saudi Arabia and rest of GCC will continue even if crude oil price heads back to $70 per barrel. These countries have sufficient reserves to support their large development outlays.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.