"Ready for a rally" - UBS Investment Research

"Sectors under the most pressure also rebound the most": UBSJOINING A small but growing chorus of bulls, UBS issued a report yesterday (Mar 19) saying “there is reason for optimism in global equity markets.”It noted that US monetary and fiscal policy response has been aggressive and more is likely on the way. ”Coupled with attractive valuations, low interest rates, and reasonable earnings growth, we believe prospects for a more sustainable rally in equities appear good.” UBS has an overweight rating on the US, neutral on Global Emerging Markets and Japan, and underweight on Europe and UK.Referring to the all the angst currently, UBS said there is a silver lining. While fundamental pressures on the US economy stemming from the decline in house prices persist, the policy reaction to financial market turmoil has become increasingly aggressive, particularly from the Federal Reserve.The uncertainty that has depressed overall equity market valuations is likely to dissipate, leading to a more sustainable rally than has appeared probable in recent months. “Thus, we are getting ready for a shift in markets to a more positive assessment of near term prospects based on the policy response we’ve seen so far and what may yet be coming.”In deciding how to position oneself for the rally, UBS noted that the historical pattern of a market rebound suggests that the sectors that have been under the most pressure also rebound the most. “Therefore, we have lifted our allocation to Financials and Consumer Discretionary.”Looking back over previous market sell-offs (-10% from 12-month peak) that were followed by a sharp rebound (greater than 10% in three months), UBS found that the sectors that led markets lower also tend to lead in the recovery.“This is an intuitive result insofar as a rebound in markets is probably driven by a change in fundamental expectations that allows the most impaired sectors to recover, while short-covering in bombed out sectors also reverses course.”UBS added: “We believe that markets are poised for a broad recovery in valuations driven by a decline in risk premiums. These moves are likely to benefit the whole market.”

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IS THE sun peeking out now after the dark night of the US financial crisis?

There are perma bears who believe otherwise. There are born optimists for whom the sun will always shine. Increasingly, it seems that “experts” of various stripes are saying that indeed investors will feel the warmth of the sun soon. On March 20, US analyst Richard Bove was quoted by Bloomberg saying in a note to clients: “"I do, in fact, believe that the crisis is over. There will be more negative developments but they will be meaningless." UBS Investment Research and guru Barton Biggs are among other prominent voices who believe so too. The latest are Mark Mobius and Temasek Holdings’ fund management unit.In a March 27 article by Bloomberg, Temasek unit Fullerton Fund Management’s CEO said investors have passed ``the point of maximum fear'' amid the global credit squeeze and it expects to meet a target of US$3 billion in assets by June. Fullerton, which oversees US$2.5 billion of third-party money and an undisclosed amount of capital for Singapore's sovereign wealth fund, saw the U.S. Federal Reserve's decision to rescue Bear Stearns from bankruptcy as a turning point, Fullerton's Chief Executive Officer Gerard Lee said in the Bloomberg article.``The Fed coming in to facilitate JP Morgan Chase & Co’s purchase of Bear Stearns is a watershed event, and most bottoms are found during watershed events,'' Lee said in an interview in Singapore. ``From that perspective, we could have already crossed the point of maximum fear.''

Mobius is Singapore-based and author of numerous books on emerging markets.Templeton Asset Management Ltd.'s Mark Mobius said he ``generally'' agrees with Temasek's assessment that the markets have reached a bottom. ``If we haven't achieved it, we're damn close,'' Mobius, who oversees US$47 billion in emerging-market equities, said in a phone interview from Hong Kong on Mar 27. ``With the kind of liquidity that's pouring into the system, with the Fed, and now the European Central Bank and others putting more money into the system, we think stock prices are not going to remain down. We think there's a good chance of growth going forward.''

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