Allianz GI Capital Markets Monthly

Allianz GI Capital Markets Monthly
“Bear market”
“Will the crisis ever be over?”, asks Hans-Joerg Namer, Head of the Capital Markets Analysis team of Allianz Global Investors KAG, in the current edition of the capital market letter.
crisis on financial markets has been dragging on for 20 months now, almost as long as the average of all the economic crises recorded since 1875. Price losses of more than 50 percent, in terms of the S&P 500, lie behind us, significantly more than the average 35 percent in previous crises. Is there no end to this crisis?
But wait: some investors, primarily strategic, are returning to the market with buy orders. The first IPO on Wall Street was taken up well, as was a series of high-volume corporate bonds, which appeal to investors due to their risk premiums. Emerging markets are also adding selectively to their holdings, sometimes market share, sometimes company expertise.
The markets are negating positive news
While equity markets dived deeper into the red in February on the back of the reporting season and concerns about the economy and financial system, tenacious investors are asking when the bear market will come to an end. Some of the typical conditions appear to be met:
Central banks around the world have been switching over to an expansive monetary policy for about one and a half years (this should take effect slowly),
Comprehensive fiscal packages have been put together (most recently for the US, running to just under USD 800billion), while aid for the banking sector is becoming increasingly extensive (US Treasury Secretary Timothy Geithner is currently putting together a further package, although the details are still unknown),
Government bond yields have fallen substantially; the risk premiums on corporate bonds (spreads) have exceeded their peak in November of last year, although they did widen again somewhat in February. This trend should be observed further. From a historical perspective, the risk premiums narrow about six months in advance of the equity market;
Sentiment is rock-bottom: while the fundamental data is revealing the first glimmers of hope and bond issues are being taken up well, the markets are dismissing the positive news to a very large extent. Bears rule the prevailing climate of opinion.
Investors profit from balance sheet adjustments
There are two developments in particular that are still missing in this line-up, which could herald an end to the bear market: the economic indicators must bottom out and there must be an improvement in the momentum for earnings expectations.
Over the next few weeks indicators from the real economy should consequently be the main focus, especially since the reporting season is
largely over. The “tidying-up” resulting from the financial market crisis should continue to be borne in mind.

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