Draaisma speaks: “That’s enough for now”

We don’t want to kick off some kind of cult of the outsized ego - but it is our duty to alert readers to the fact that Teun Draaisma, head of Morgan Stanley’s European equity strategy team, has a new stance.

If you’re not familiar with Draaisma, you can read about him in Wednesday’s People column in the FT. The long and short of it is that Morgan Stanley’s man told his clients to keep buying, then sell, buy again and sell at the appropriate times last year.

The latest call is that, despite highly uncertain fundamentals, the 20 per cent drop in MSCI Europe from the peak last June is enough for now. With sentiment bearish and valuations attractive, they’re moving into equities, on a tactical three to six months basis.

The move, says Draaisma, is based on three factors:

1) Sentiment is at extremes. As we wrote on January 21, a range of sentiment measures is at or close to all-time bearishness, including AAII survey, and put/call ratios.
2) Valuations at recession levels. Our Fundamentals, Capitulation and CVI indicators all say buy now. Our CVI closed on 21st January at -1.2 and fell as low as -1.85 in early trading on the 22nd, close to the -2 crisis ‘must buy’ level. Our combined market timing indicator said -0.77, from which equities have traditionally rallied by an average of 9.5% over the next 6 months and with a hit ratio of 87%. The trailing PE of 11.2 for MSCI Europe implies a fall of 23 percent in earnings to take us back to the long-run average PE of 14.5. The percentage of companies with a dividend yield above
the real bond yield is 74 percent.
3) More reflation. Fundamentals are highly uncertain, but after the recent market turmoil we except more reflation efforts from authorities, including further rate cuts and fiscal stimulus that should help to stabilise markets. There have been 15 Fed rate cuts of 75bps or more since 1970, the average 6-month performance of MSCI Europe post such a cut is 10.3% and with a 79% probability of positive performance. As one client put it to us: when authorities start to panic, markets stop panicking.

These kind of bear rallies, say MS, can last for two to six months and are likely to be in the 10 to 20 per cent range. Fundamentals continue to be weak - they expect a fall in European earnings of 1 per cent this year, but with risks very much to the downside.

If this is a mild recession then this could well be the low point for markets in this recession. If it is a more severe, global slowdown - which we think is more likely - then we may well go to lower lows after the bear market rally. But the market is oversold enough for us to be wanting to buy a bit today.

This entry was posted by Helen Thomas on Wednesday, January 23rd, 2008 at 10:39 and is filed under Capital markets. Tagged with morgan stanley, Teun Draaisma. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.