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- 1. Merchant Banking | Global Markets | Client Solutions Development Group (CDSG) Marketing Communication Structured Equity Market Overview # 13 Bi-Weekly 02-Feb-2009 I. Editorial by Philippe Gijsels Structured Equity Strategist Still undecided We see similar reflexes all around the world as governments try to protect The US stock market suffered a fourth straight losing week on the their own jobs and own markets. It is not hard to imagine how the actions back of mostly bad economic data and mostly cautious earnings guidance. Stock markets in Europe and Asia fared a bit better. However, there was by one nation may cause other countries to “retaliate” in terms of not immediately a stock market party either. protectionism, causing a negative chain reaction. Overall, the stimulus plan will create a better stock market environment and be a key element Over 230 companies from the S&P500 reported earnings. And for in the continuation of the bear market rally. On the other hand, we should whom it was not already crystal clear: earnings estimates for 2009 are still certainly not be blind to the risks of protectionism and remember that the way too high and will have to come down. Analysts have already brought protectionist reflex greatly contributed to the severity of the great down their figures for Q1 and Q2 of 2009. However, they still expect the depression. Our history books teach us that the in 1930 passed economy to rebound (strongly) in the second half of this year. This Snoot-Hawley tariffs were met with reciprocal tariffs in other will just not happen. countries and world trade declined by 60%. Imagine what this would do to our “globalised” world… Microsoft even refused to give guidance for the entire 2009, which means that they have no visibility whatsoever. Caterpillar a company with 60% of its turnover outside the US, also reported very disappointing figures As for the “bad bank”, there were rumors on friday that the idea is and announced job cuts. The German IFO was a bit above expectations as put in the fridge for the time being. However, we would not be was US Q4 GDP. The latter was mainly because of rising inventories, surprised if the Obama Administration were to announce a “big something that should be corrected (in a negative sense) over the next bang” financial cleanup program in the not too distant future. Quite a couple of quarters. Overall, there is and remains only one word to describe bit of options are still being discussed as what money (TARP money?) will the current economic and corporate environment: Bad. be used and how the assets that are moved from the banks’ balance sheets will be valued. A model-based approach instead of an auction So what we can hope for over the next couple of weeks is the (re)- seems to have the largest probability. There is also a rumor that some emergence of some leadership on the stimulus plan and the “bad sort of a plan to reduce mortgage payments to maximum 38% of income bank” idea. The Obama stimulus plan has been voted in the House of is under consideration. It is clear that this would help the housing market Representatives (without the supports of the Republicans, so it will not be a to get back on its feet. bi-partisan deal that many hoped for). So over course of the next couple of weeks the plan will most probably also be voted in the senate. It will contain something for everyone: tax cuts; incentives to hire workers, So, even though the battle between Central Banks an governments infrastructure spending, aid for the States etc… After all, we are talking and the crisis is still undecided we continue to give the rally the about quite a bit of money. It is doubtful that the plan will be able to create benefit of the doubt. In a way, it is impressive that markets were able to the 3,000.000 new jobs that it is aiming for. However, in a war, even an hold on above the November lows, given the massive amount of bad economic one, every riffle and bullet counts. There will certainly be jobs news that has been hitting our screens. A market that no longer wants created. And more importantly, it may boost confidence, which is to go down on bad news, is ready to move up. exactly what the economy and the stock markets around the world need. Over the next couple of weeks quite a bit of earnings and economic figures will hit our screens. Most of them will continue to be bad. One troubling aspect of the plan is the subtle move towards We continue to cast our view hopefully towards Washington. White economic nationalism. A “buy America” program is part of the smoke on the “bad bank” and the Obama rescue package is what stimulus package. we need to see.
- 2. Marketing Communication II. Fortis Market Sentiment Indicator Fortis Sentiment Indicator 2.50 Since the collapse of Lehman Brothers mid september, our Too optimistic : sell sentiment indicator has averaged -2.9. With a current 1.50 reading of -2.3, optimism remains weak in absolute terms 0.50 although this value is not dramatically low compared with the current standards. -0.50 Sentiment -1.50 -2.50 Too pessimistic: buy signal -3.50 Bearn Stearns LTCM collapse 2002 end of bear crisis 11 Sept. market -4.50 Methodology of the indicator: -5.50 Our sentiment indicator is built by combining 3 indices: Jan 97 Sep 97 Jun 98 Feb 99 Oct 99 Jun 00 M 01 Nov 01 Jul 02 Apr 03 Dec 03 Aug 04 M 05 Jan 06 Sep 06 Jun 07 Feb 08 Oct 08 ay ar • the put call ratio, • the difference between the American Association of Individual Investors (AAII) bullish and bearish readings and, • the weekly average of the Vix index. The data are updated on a weekly basis. All 3 indices are equallly-weighted and results are normalized. Our resulting sentiment index is a contrarian indicator. Readings below -2.5 indicates extreme fear in the market or oversold conditions while readings above 1.6 show too much optimism or overbought conditions. When the indicator is in oversold territory, it is usually a good entry point to buy equity. Conversely, when the indicator is in overbought territory, it is usually a good sell signal. We backtested our indicator from January 1997. We get 10 readings below -2.5 over that period. Entering the stockmarket at those moments of extreme stress has yielded an impressive average 3-months return of 11.7% on the S&P 500 (i.e. 47% on a yearly basis) and of 11% on the DJ Euro Stoxx 50 (i.e. 44% on a yearly basis). Our indicator has reached a value of -3 five times over our 11 years history: in october 1998 when LTCM collapsed, the 11th of September 2001, in October 2002 at the end of the 2002 bear market, in March 2008 following the Bear Stearn crisis and now since the Lehman Brothers bankruptcy. III. Implied volatility and implied correlations • Implied volatility:it shows some tentative signs of easing off a bit. Still, it is important to note that we speak here about the medium term (5 year) implied volatiltiy. In other words, the market now expects to be entering a much more volatile world in the years ahead. • Correlation: the implied as well as the historical rolling correlations have levelled off at high levels Implied volatility Correlation 5Y ATM implied volatility Historical rolling correlations 42.0 100% 38.0 80% 60% 34.0 40% 30.0 Correlation 20% 26.0 0% 22.0 -20% 18.0 -40% 14.0 -60% 06/2003 08/2003 11/2003 02/2004 05/2004 08/2004 10/2004 01/2005 04/2005 07/2005 10/2005 12/2005 03/2006 06/2006 09/2006 12/2006 03/2007 05/2007 08/2007 11/2007 02/2008 05/2008 07/2008 10/2008 01/2009 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 S&P 500 & DJE 50 S&P 500 & NIKKEI 225 DJE 50 & NIKKEI 225 DJ Eurostoxx 50 Nikkei 225 S&P 500 Source: Fortis 5Y implied volatility DJE 50 NIKKEI S&P 500 Correl ASK ATM DJE 50 NIKKEI 225 S&P 500 Standard deviation 4.3 4.2 4.4 DJE 50 100% 88% 92% Mean (%) 22.3 20.9 21.1 NIKKEI 225 88% 100% 85% Current level (%) 33.7 38.5 36.1 S&P 500 92% 85% 100%
- 3. Marketing Communication IV. Valuations Valuations of world equity markets are currently certainly not demanding. At the end of the day it of course all boils down to the question of how long and how deep earnings will keep dropping. This quarter will be the 6th consecutive quarter of declining earnings, matching the earnings slump of 2001. With the 4th quarter of earnings half-way through, one can draw some preliminary conclusions. We are currently heading to an earnings decline of about -30% compared with Q4 2007 and we are back to the Q4 2002 earnings level. Of course Financials are taking on a big chunk of the losses. Excluding Financials, current decline is - 14.6% when share-weighted or -4% when market-cap weighted. As for the distribution of earnings surprises, the picture looks a little bit brighter than 2 weeks ago with 60% of positive surprises (= actuel earnings higher than analysts' expectations). Still, we have to go back to the nineties to match current negative surprises (which stand around 30% at the moment). The tables below depict for the PE, the EPS and the dividend yields, 2007's mean level and JCF's forecasts for 2008. The historical averages are calculated from the last 10 years figures. The last column presents the ratio of the 2008 estimates and historical averages. The interest is to compare the current situation with a period that represents a quot;full economic cyclequot;. World indices DJ Eurostoxx sector indices Datas & figures have been extracted from FACTSET Datas & figures have been extracted from FACTSET Next 12 Next 12 Actual P/E Next 12 Hist. Avg months Actual P/E Next 12 Hist. Avg months P/E 2008 months P/E (last 10yrs) P/E Vs Hist 20088 months P/E (last 10 yrs) Avg Vs Hist Avg Automobiles & Parts 8.5 x 20.8 x 12.8 x 162% 6.8 x 8.3 x 14.7 x 57% AEX Bench (NL) Banks 7.5 x 6.0 x 14.6 x 41% Basic Resources 4.1 x 8.7 x 13.9 x 63% 13.0 x 8.4 x 14.9 x 57% Bel 20 Bench (BE) Chemicals 8.8 x 9.5 x 17.5 x 54% 8.6 x 8.8 x 18.2 x 48% CAC 40 Bench (FR) Construction & Material 7.3 x 7.7 x 13.7 x 56% 14.6 x 9.3 x 20.9 x 45% DAX Price Bench (DE) Financial Services 42.8 x 8.5 x 18.9 x 45% 9.1 x 8.2 x 18.3 x 45% Food & Beverage DJ Euro Stoxx 50 Bench 12.0 x 11.6 x 18.9 x 62% Health Care 10.7 x 9.7 x 24.1 x 40% 8.1 x 8.9 x 13.8 x 65% FTSE 100 Full Share Bench (GB) Industrial Goods & Services 9.0 x 8.7 x 21.2 x 41% 12.7 x 12.2 x 21.2 x 57% S&P 500 (US) Insurance 12.2 x 6.5 x 19.4 x 34% 10.1 x 9.0 x 14.9 x 60% Hang Seng Index (HK) Media 10.1 x 8.8 x 44.1 x 20% Oil & Gas 6.1 x 7.9 x 13.5 x 58% 11.2 x 11.0 x 11.4 x 96% KOSPI Index Bench (KR) Personal & Household Goods 13.3 x 12.3 x 166.3 x 7% 16.0 x 15.9 x 35.3 x 45% Nikkei 225 Bench (JP) Retail 11.6 x 11.0 x 21.7 x 51% Technology 10.8 x 17.1 x 51.0 x 34% Actual Earnings Historical EPS Growth Telecommunications 10.9 x 9.2 x 37.5 x 25% Earnings Per Per Share Travel & Leisure 13.5 x 13.8 x 21.1 x 65% Avg (last 10 09 Vs Hist Share % % Change Utilities 11.0 x 9.4 x 16.6 x 56% yrs) Avg Change 2008 09 Actual Earnings Historical EPS -5.8% -18.3% 4.7% -387.7% AEX Bench (NL) Earnings Per Per Share Avg (last 10 Growth 09 Share % % Change -50.2% 54.1% 2.9% 1839.3% Bel 20 Bench (BE) yrs) Vs Hist Avg Change 2008 09 -4.9% -10.5% 10.6% -98.8% CAC 40 Bench (FR) -26.7% -66.1% 7.9% -832.2% Automobiles & Parts -46.0% 38.8% 9.3% 418.5% DAX Price Bench (DE) -36.9% 12.7% 8.5% 149.8% Banks -19.9% 0.9% 9.4% 9.2% DJ Euro Stoxx 50 Bench 76.3% -55.4% 33.1% -167.6% Basic Resources 10.2% -17.0% 10.9% -155.6% FTSE 100 Full Share Bench (GB) 4.9% -15.9% 16.6% -95.9% Chemicals -14.7% -6.5% 5.4% -120.5% S&P 500 (US) -8.2% -13.2% 14.6% -90.7% Construction & Material -2.9% 3.4% 10.8% 31.6% Hang Seng Index (HK) -81.2% 341.2% 1.9% 17542.4% Financial Services -19.3% 2.1% -3.7% -56.5% KOSPI Index Bench (KR) 4.1% 2.3% 7.5% 31.1% Food & Beverage 5.3% 9.1% 10.5% 87.1% Health Care -32.6% -11.6% 33.5% -34.7% Nikkei 225 Bench (JP) 3.9% -4.3% 12.4% -35.0% Industrial Goods & Services -63.3% 61.8% 11.9% 521.1% Insurance Stock markets did some rollercoasting over the last 2 weeks, losing little ground -6.3% 7.0% 12.7% 55.3% Media in the end. 13.3% -23.6% 16.1% -146.8% Oil & Gas -11.5% -2.4% 565.8% -0.4% Personal & Household Goods 0.6% 4.7% 4.9% 96.4% Retail Surprisingly, sectors with a defensive tone like Telecommunications or Health -2.7% -42.4% 27.9% -151.9% Technology Care did very bad during the fortnight The Telecommunications sector has lost -8.4% 6.5% 27.0% 24.2% Telecommunications more than 15% since its high reached in begin January this year. Gainers are to -32.6% -10.2% 13.7% -74.3% Travel & Leisure 6.1% 6.9% 11.8% 58.0% Utilities be found among Oil & Gas, Retail or Personal & Household Goods. Actual Net Net Div Net Div Hist. Avg Div Yield Yield 08 Vs Yield 09 (last 10yrs) 2008 Hist Avg Actual Net Actual Net Net Div 2.9% 2.6% 2.7% 95.7% Automobiles & Parts Hist. Avg Div Yield Div Yield Yield 09 Vs 4.6% 7.1% 3.2% 221.5% Banks (last 10yrs) 2008 YTD Hist Avg 5.6% 5.6% 3.5% 160.6% Basic Resources 4.9% 5.4% 3.0% 178.9% Chemicals AEX Bench (NL) 5.7% 6.0% 3.4% 175.2% 5.7% 6.1% 2.7% 222.0% Construction & Material 5.9% 6.6% 3.4% 195.0% Financial Services Bel 20 Bench (BE) 4.0% 4.8% 3.1% 155.3% 3.7% 3.5% 2.2% 158.6% Food & Beverage CAC 40 Bench (FR) 4.8% 5.6% 2.5% 224.5% 3.5% 3.8% 1.7% 223.1% Health Care DAX Price Bench (DE) 4.4% 5.1% 2.5% 200.9% 4.7% 4.9% 2.4% 199.7% Industrial Goods & Services 5.6% 6.7% 2.8% 237.8% Insurance DJ Euro Stoxx 50 Bench 5.1% 6.2% 2.9% 211.9% 5.9% 6.4% 2.6% 249.1% Media FTSE 100 Full Share Bench (GB) 5.3% 5.6% 3.5% 156.6% 6.5% 6.5% 3.5% 182.1% Oil & Gas 3.0% 3.4% 1.6% 207.9% Personal & Household Goods S&P 500 (US) 3.0% 3.1% 1.7% 178.7% 3.8% 3.8% 1.9% 199.8% Retail Hang Seng Index (HK) 4.7% 5.1% 3.0% 171.1% 3.0% 3.1% 1.4% 223.0% Technology 6.7% 7.9% 3.2% 250.5% Telecommunications KOSPI Index Bench (KR) 2.3% 2.3% 2.1% 106.9% 4.4% 4.5% 2.3% 190.9% Travel & Leisure Nikkei 225 Bench (JP) 2.4% 2.6% 1.2% 220.0% 5.7% 6.2% 3.8% 165.7% Utilities
- 4. Marketing Communication V. Earnings momentum Earnings growth estimates for 2008 were initially quite high as the comparison with a weakened 2007 was fairly easy and analysts were assuming that the impact of the credit crunch related fallout would be limited in time and scope. As the crisis drags on, earnings estimates for 2008 were sharply revised down. The same scenario seems to be repeating itself in 2009, as earnings estimates are gradually coming down. Forward PE evolution S&P 500 : EPS growth (%) 40 26 35 21 30 16 11 25 6 1 20 -4 15 -9 10 -14 -19 5 -24 01/10/01 01/03/02 01/08/02 01/01/03 01/06/03 01/11/03 01/04/04 01/09/04 01/02/05 01/07/05 01/12/05 01/05/06 01/10/06 01/03/07 01/08/07 01/01/08 01/06/08 01/11/08 31/01/07 30/04/07 31/07/07 31/10/07 31/01/08 30/04/08 31/07/08 31/10/08 F.Y. 2008 F.Y. 2010 F.Y. 2009 S&P500 DJE 50 NKY 225 Source: FACTSET Source :FACTSET NIKKEI 225 : EPS growth (%) DJE 50 : EPS growth (%) 14 22 12 18 10 14 8 6 10 4 6 2 2 0 -2 -2 -4 -6 -6 -10 -8 -14 -10 -18 -12 -14 -22 -16 -26 -18 -30 -20 -34 -22 -24 -38 01/01/07 01/04/07 01/07/07 01/10/07 01/01/08 01/04/08 01/07/08 01/10/08 01/01/09 01/01/07 01/04/07 01/07/07 01/10/07 01/01/08 01/04/08 01/07/08 01/10/08 01/01/09 F.Y. 2009 F.Y. 2010 F.Y. 2008 F.Y. 2009 F.Y. 2010 F.Y. 2008 Source : FACTSET Source : FACTSET Contact details: Dirk-Emma Baestaens Sales Derivatives & Structured Products Head Client Solutions Development Group dirk.baestaens@fortis.com Fortis Bank sa-nv, with registered office at Montagne du Parc 3 / Warandeberg 3, B-1000 Brussels (“Fortis Bank”), is responsible for the production and the distribution of this document. This document was not prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not constitute an offer or solicitation for the sale, purchase or subscription of financial instruments nor an offer for the provision of investment services, in any jurisdiction. The information contained in this document should not be regarded as a recommendation or investment advice. Fortis Bank does not guarantee that a transaction could be executed at that price and cannot be held liable for any incorrect information or for any direct or indirect damages, losses, costs, claims, liabilities or other expenses which would result from the use of, or reliance on, this information. This document does not purport to give an exhaustive description of the issues and/or topics addressed in it and, although all reasonable care has been taken to ensure that it is accurate, neither Fortis Bank nor its affiliated companies, directors, advisors or employees can be held liable for any incorrect, incomplete or missing information, or for any direct or indirect damage, losses, costs, claims, liabilities or other expenses which would result from the use of, or reliance on, this document, except in case of wilful misconduct or gross negligence. Fortis Bank may change the information contained in this document without any prior notice and is under no obligation to inform investors about any such change. Fortis Bank is authorised and regulated as a credit institution by the Belgian Banking, Finance and Insurance Commission, rue du Congrès 12-14 / Congresstraat 12-14, B-1000 Brussels, Belgium. © All rights reserved.