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Goldman, Credit Suisse: 3 Reasons Why Market is Riskier; Hold Your Cash
Aspire | 28 October 2015
By: Lim Si Jie
Articles (169) Profile

1)      Credit Suisse: Fall In Global Risk Appetite Shows Ominous Signs

Back in January 2012, global risk appetite had fallen sharply when investors were panicking over a possible breakup of the euro bloc, the possible butterfly effect of Greece’s bankruptcy and unsustainably high sovereign borrowing costs.

According to Credit Suisse’s Global Risk Appetite Index, the world is now facing a scarcity of risk appetite. In fact, Credit Suisse’s Global Risk Appetite Index has now dropped to “panic” levels for the first time since January 2012, as investors feared a sharp slowdown in China’s economy and a collapse in commodity prices.

Source: Credit Suisse

Incidentally, global equity markets have also ended their worst quarter in four years.

Historically, these are the previous times in which the Global Risk Appetite Index had reached panic state:

  1. The onset of the 2008 financial crisis
  2. After the Sept. 11, 2001 attacks on the U.S.
  3. During the 1999-2001 dotcom bubble and
  4. After Black Monday in 1987.

2)      Goldman Forecasts First Negative Year Since 2011

And it is not just Credit Suisse that has sounded its warnings to investors. Goldman Sachs, who now expects the S&P 500-stock index to finish in the red in 2015, is also flagging worrying concerns.

Goldman Sachs Chief U.S. equity strategist David Kostin lowered his year-end price target for the S&P 500 to 2,000, citing slower than anticipated growth from the world’s two biggest economies and lower-than-expected oil prices. Goldman’s proprietary metrics suggest that the Chinese economy is growing by roughly a full percentage point slower than what the official data indicates. On top of that, the team has also downgraded its forecasts for US and global growth in 2016.

If S&P 500 were to close at 2,000, it would represent a drop of nearly 3 percent year on year. This would be the benchmark index’s first negative year since 2011.

3)      Price-to-Earnings Expected to Fall

Kostin’s team at Goldman believes that the risks for the index level and price-to-earnings multiple have also increased. While some strategists contend that the initiation of a tightening cycle will be a positive for the US dollar and also for market multiples, Goldman’s team has taken a different view.

Statistically speaking, price-to-earnings multiple fell by an average of eight percent during the three months following Fed ‘liftoff’ hikes in 1994, 1999, and 2004. However, the multiple compression was then offset by four percent by growing company earnings. Goldman argues that the price-to-earnings ratio for the S&P 500 has already peaked, which would leave earnings growth as the sole contributor to positive returns for the rest of this cycle.

Investors Takeaway: Prevent Panic Selling, Hold Cash for Short Term Tactical Opportunities

Analysts at Credit Suisse believe that panic is an overreaction to short-term events. To prevent panic selling, investors need to ensure that invested holdings are additional capital that are not required for expenses.

On the other hand, analysts also see overreaction as an opportunity to buy risky assets at a cheaper price for rebound in prices. For example, the recent rebound in crude oil prices could be an opportunity for short term trades.

That being said, investors should only use this as a short-term tactical opportunity, rather than going in for the long haul, given that global growth is not a strong supportive factor for risky assets right now. Risk-taking investors with any short term holdings can hold cash to await such buying opportunities.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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