Is it time to welcome back the bull?

AS GLOBAL STOCK markets finally show signs of improvement, a consensus is emerging among stock market analysts that now is the time to get back into equities. But have markets really hit an inflection point? And, if so, is it time to wave goodbye to the bear and welcome the return of the bull?

There is certainly plenty of money out there looking for a home. According to the Central Statistics Office, the Irish savings ratio is of the order of 17 per cent, which means that for every €1 of disposable income, households are saving almost 20 cent – in 2007, the percentage saved was zero.

But chastened from their experiences, investors are keeping their funds on deposit, earning a safe 3-4 per cent, rather than risk the vagaries of the markets.

Now, however, the data looks more encouraging, despite further volatility last week. In the US, the SP 500 had its best first-quarter rally since 1998, advancing by more than 12 per cent, while the Dow Jones recently crossed the 13,000 mark for the first time since 2008, and was up by 8.1 per cent in the first quarter.

Tech stocks continue to roar ahead, with the SP 500 Information Technology Index recently gaining for a 14th straight week, its longest streak since at least September 1989. Apple continues to reach new records, with analysts touting a $1,000 target for it, while investors are eagerly awaiting Facebook’s imminent $100 billion flotation.

Here at home, the Iseq has put in its best first-quarter performance since 2000, jumping 12.2 per cent, while March represented the sixth successive month of gains.

Although markets were choppy again last week, for many, indicators are nonetheless pointing to a revival of equities. Indeed, earlier this month, Goldman Sachs, the global banking behemoth, made its own pronouncement on the market, when it put forward a solid case for equities.

In a research report, it said it was time to say a “long goodbye” to bonds, and embrace the “long good buy” for equities. It claimed that the “prospects for future returns in equities relative to bonds are as good as they have been in a generation”, because stocks are under-valued, and are factoring in unrealistically negative growth expectations.

Eoin Fahy, chief economist of Kleinwort Benson Investors, is inclined to agree that bonds may no longer be the best option for investors.

While he concedes that investing in German bunds is a “default risk free” approach, he points out that it is not entirely risk free. If interest rates start to rise, investors could stand to lose their money, he says. Moreover, lending to the German government at just 2 per cent won’t offer investors any real return if inflation starts to rise.

As a result, he favours equities in the current environment, arguing that “by no measure of valuation are they expensive”.

“The corporate sector worldwide is in a very strong position; cash levels are high and debt levels are low,” he adds.

And he’s not alone in his thinking, with some analysts adopting a particularly bullish stance.

“I truly believe we are in the early days of a return to ‘the cult of the equity’ that will see equity markets double over the next decade and break the grip of this current bear market that started 12 years ago,” says Pramit Ghose, managing partner at Bloxham Stockbrokers.

Ghose’s thesis is based on a number of factors, including historical performance of a bull market following a bear market; the fact that global equities are still trading at price/earning valuation levels of near 25-year lows; and that flows into equity funds have entered their sixth consecutive negative year.

“Everyone hates equities now,” he says, adding that his bullish position is partly to do with signs that the US economy is finally appearing to be gaining “positive momentum”. He also points to continued dividend growth, forecasting a rise of about 7-8 per cent globally this year.

Rather than invest all your money now, however, analysts such as Ghose suggest a drip-feed or “averaging-in” approach, whereby you invest a certain amount each month or so. This can help even out any fluctuations in values and weather any temporary peaks or troughs.

He also recommends acquiring “conservative, cash-flow strong companies” of the likes of Diageo, Procter Gamble and Johnson Johnson.

Given that these companies now depend on emerging markets for a significant portion of their sales, such an approach can also give adequate exposure to regions such as the Bric (Brazil, Russia, India and China) countries without the risks of investing directly in these regions.

Given the levels of volatility, a long-term approach might also be sensible.

“When investing in equities, you shouldn’t be looking at what’s happening in the short-term,” says Fahy, adding that “one should always be looking at a five-year time-frame”.

However, not everyone is so bullish.

For Paul Sommerville, chief executive of Sommerville Advisory Markets, now is “not a good time to be adding to your portfolio”, as he determines that markets are a little over-valued.

“For short-term traders, the level of volatility is good, but for those investing for the long-term, the market looks a bit on the top side. When you have a pullback, that’s the time to get back in,” he suggests.

In any case, he doesn’t think the current rally will endure.

“For longer-term investors, the problems in Europe still haven’t gone away and I’d be still on the cautious side,” he says, adding that “problems in Spain and Italy will rear their heads later in the year”.

Because markets have had such a good rally, he says that those investors who already have a portfolio of shares should now be looking to “trim” it, rather than add to it.

And even a bull such as Ghose doesn’t rule out any further corrections, noting that he could see markets slide by a further 10 per cent later this year.

However, he doesn’t think it will be any more severe than that. In any case, if you’re buying to hold, it shouldn’t be an issue.

“Volatility is not always the worst thing from an investor’s point of view, provided that they take the long-term view,” says Fahy.