The US$13 billion global equities manager Trilogy Global Advisors has joined the growing list of funds managers prepared to call the bottom for equity markets, and is already overweighting stocks leveraged to global economic recovery such as technology and consumer discretionaries.
Trilogy’s chief investment officer Bill Sterling (a former global head of equities at Credit Suisse Asset Management, in the days when it was an equity manager) said the rapid deterioration in financial conditions following the Lehman Brothers bankruptcy was a massive contractionary trigger.
“Everyone found out that interest rates are not the sole determinant of economic activity,” Sterling says.
However Bloomberg’s Financial Conditions Index staged a V-shaped rebound in the last few months, and is now pricing in a US GDP decline of about 3 per cent rather than the depression scenario of 8 to 9 per cent.
“Look at what’s been working in markets – emerging markets, consumer discretionaries, IT, resources have all been leaders this year, and that wouldn’t be occurring if we were heading to a Depression.”
Given the US Treasury is forecasting inflation of 1 per cent for the next five years, Sterling said this gave the equity market headroom for a further 30 per cent rise before the Fed’s long term inflation target of 2 to 3 per cent became a problem.
Sterling acknowledged that massive risks to a positive equities outlook remained, particularly the question of whether global loan losses would outstrip the ability of financial institutions to raise capital – the losses are winning with US$1.3 trillion written off globally to date (with US$4 trillion projected by the IMF) against US$1.1 trillion of new capital raised.
Sterling placed faith in Deutsche Bank economic research which showed that a reduction in the speed of private sector debt contraction (a “positive credit impulse”) would allow both economic growth and de-leveraging to occur at the same time.