ABN Leads Stocks Bears as MFS Sees No Repeat of 03 (Update1)
By Lynn Thomasson and Alexis Xydias
Jan. 22 (Bloomberg) — The last time the Standard %26amp; Poors
500 Index was at least 10 percent below its previous high, in
2003, the worlds biggest stock investors were bullish.
Not this time. Institutions handling $1.5 trillion,
including Baring Asset Managements Andrew Cole, ABN Amro Asset
Managements Joost van Leenders and MFS Investment Managements
James Swanson, are holding or selling. They say stocks are
riskier today than they were during that last correction in 2003,
even though valuations are half as much.
“Its a much more dangerous game today, said Cole, 44, a
fund manager who helps invest $48 billion at Baring in London.
“2008 is going to be a year of preservation of capital. Weve
got a lot of cash and were not frightened to say so.
Cole, whose firm favored shares over bonds or cash in 2003,
said in an interview hes “underweight equities this year
because evidence of a U.S. recession is mounting. Januarys
decline in the S%26amp;P 500, the benchmark for American equities,
marked the worst start in the indexs history.
The Federal Reserves three interest-rate cuts since
September havent encouraged stock investors about the prospects
for the economy. Equities are the cheapest relative to bonds
since 1974, and still investors are shifting funds to fixed-
income.
Steepest Drop
Stocks got even less expensive as the MSCI World Index
dropped 3 percent yesterday, its biggest decline since 2002. The
global benchmark slipped 1.1 percent today, its sixth straight
decline and the longest stretch of losses since the period ended
July 18, 2006.
Benchmark indexes from Hong Kong to London and Brazil
retreated yesterday as concern grew that a U.S. recession will
weaken global growth. Japans Nikkei 225 Stock Average dropped
today by the most since September 2001, and Australias All
Ordinaries Index tumbled the most since October 1989. In Hong
Kong, the Hang Seng Index was headed for its biggest two-day
slump in a decade.
Investors pulled money from U.S. stock funds every month
between May and November, the longest streak this decade,
according to Investment Company Institute, which compiles data
from 4,744 equity funds with $6.6 trillion in assets.
Net inflows to fixed-income funds in 2007 were the biggest
since the start of the U.S. bull market in 2002, according to
data from ICI, the Washington-based trade group for the mutual-
fund industry.
“What weve been telling people to do is, `Face reality and
take action. said David Darst, the New York-based chief
investment strategist for Morgan Stanleys private banking unit,
which oversees $700 billion.
Recession Forecasts
Last month, Darst recommended clients raise their cash
holdings to 16 percent of assets. He told them to move money from
equities to hedge funds that use futures to bet on currencies,
interest rates and commodities.
ABN Amro Assets van Leenders, 38, the firms investment
strategist, said hes daunted as earnings fall and predictions
from Morgan Stanley, Goldman Sachs Group Inc., and Merrill Lynch
%26amp; Co. increase investors conviction that the country is sliding
into a recession.
Profit for S%26amp;P 500 members may have tumbled an average of 17
percent in the fourth quarter, according to Bloomberg data. The
2.5 percent drop in the third was the first quarterly decline
since 2002.
End of Expansion
A jump in the jobless rate in December signaled that the
longest expansion in consumer spending on record will end in the
first quarter, Goldman said. The number of Americans who fell
behind on mortgage payments rose to a 20-year high in the third
quarter and home prices probably fell last year for the first
time since the Great Depression.
Economic growth will slow to 1.1 percent in the first
quarter, according to the median estimate of 65 economists
surveyed by Bloomberg. In 2003, the U.S. grew at an annual rate
of 2.5 percent while profits rose 17.4 percent a quarter, on
average.
A correction is any time a stock index declines 10 percent
or more from peak to trough. The latest for the S%26amp;P 500 was
reached Nov. 26, when it fell 10 percent from its record in
October.
Prior to that, the 15 percent drop in the index between
November 2002 and March 2003 was the sixth correction in three
years. Those were spurred by the collapse of the technology
bubble, the terrorist attacks on Sept. 11, 2001, a recession in
2001 and the dissolution of Enron Corp.
`Entering Recession
The S%26amp;P 500 rebounded 39 percent between its 2003 low and
the end of the year, marking the beginning of a five-year bull
market.
“The macro picture right now is much weaker, said van
Leenders, whose Amsterdam-based firm has $309 billion in assets.
“Then we were recovering from a recession, now we are entering
one.
ABN Amro Asset lowered its allocation to equities last
quarter by raising cash and buying government and investment-
grade corporate debt, he said. Swanson, the chief investment
strategist at Boston-based MFS, sold a third of the shares he
owned at the end of the year to boost his holdings in U.S.
government bonds.
The S%26amp;P 500 fell 9.8 percent in the first 13 trading days of
this year for the worst start since the indexs inception in 1957.
Stocks will drop further as the economy forces more homeowners
into default and banks losses on investments tied to subprime
mortgages double to as much as $200 billion, Swanson said.
Benchmarks Drop
MSCIs world index slid 1.1 percent to 1,380.60 as of 3:03
p.m. in Tokyo, extending its decline from an Oct. 31 record to 18
percent. Japans Nikkei 225 dropped 5.7 percent, and Australias
S%26amp;P/ASX 200 lost 7.1 percent. Hong Kongs Hang Seng plunged as
much as 8.2 percent. Indias Sensex index tumbled 12 percent when
trading resumed after a halt to avoid breaching limits.
Yesterday, Londons FTSE 100 Index dropped 5.5 percent for
the steepest loss since September 2001. Brazils Bovespa index
plunged 6.6 percent, the biggest retreat in almost a year.
“Everything is being painted with a `dump-it-now brush,
Swanson, 58, said in an interview from Omaha, Nebraska. “Seeing
those red numbers on stock after stock after stock, it changes
the psychology. Its very easy to give in to the doom of `Man,
this is really now a recession and bear market and its never
going to get better.
Banks Extend Decline
Banks and brokerages in the S%26amp;P 500, last years worst-
performing industry with a 21 percent decline, have dropped
another 13 percent in 2008. Telephone companies, energy producers
and computer makers have fallen more than 12 percent since the
start of this year.
New York-based Merrill, the biggest U.S. brokerage, had a
record loss last week after writing down the value of its
subprime-infected assets by $16.7 billion.
The stock-market slump hasnt been limited to the U.S.
Benchmarks in more than two dozen countries including Japan,
Sweden and Peru have plunged at least 20 percent from their peaks
in the past six months, marking the start of so-called bear
markets. This month alone, global stocks have lost more than $5
trillion in market capitalization, Bloomberg data show.
Stuart Fraser, who helps manage $42 billion at Brewin
Dolphin Securities Ltd. in London, said he purchased inflation-
linked government debt because “central banks will be more
concerned about rescuing the economy than worrying about
inflation.
Fraser, 61, also bought futures contracts and exchange-
traded funds that track wheat and soybean prices. Wheat reached a
record $10.095 a bushel in December and has doubled in the past
year. Soybeans set an all-time high of $13.415 a bushel this
month after surging 78 percent in 2007.
Long Volatility
Ashburton Ltd.s Peter Lucas bought futures on the so-called
VIX, the Chicago Board Options Exchange Volatility Index that
tracks the price of S%26amp;P 500 options. The gauge of stock market
price swings almost doubled in 2007.
“Whatever happens this year, volatility will remain
elevated, said Lucas, 42, who oversees $1.7 billion as chief
investment officer at Ashburton in Jersey, Channel Islands.
“Being long volatility is a smart way of hedging equity risk.
Relative to earnings, stocks are about half as expensive as
they were in 2003. Companies in the S%26amp;P 500 are valued at an
average 17.5 times reported profit, compared with 33 times at the
start of 2003, data compiled by Bloomberg show.
Stocks Get Cheaper
Theyre also cheap compared with bonds. Last month stocks
yielded 4.17 percentage points more in projected earnings than
10-year government bonds paid in interest, the biggest advantage
for equities since September 1974, according to data from New
York-based Lehman Brothers Holdings Inc. The firm adjusted for
volatility.
William Stone, 39, who manages $77 billion as chief
investment strategist at PNC Wealth Management in Philadelphia,
says shares are due for a rebound, and Bill Knapp is buying after
the Bush administration proposed an economic stimulus package of
as much as $150 billion last week. Knapp is an investment
strategist at Parsippany, New Jersey-based MainStay Investments,
a unit of New York Life Investment Management, which manages $252
billion.
“Rarely do you make an investment that makes you significant
profit that didnt make your stomach hurt when you pushed the
button, said Knapp, 46. “Thats the environment were in right
now.
MFSs Swanson says buying now is a mistake.
“It feels like youre groping your way through a dark
cellar, as opposed to hoping that youll find the bottom of the
cellar stairs and see a little bit of light, he said. “Right
now its just too dark to see ahead.
To contact the reporters on this story:
Lynn Thomasson in New York at
