Investors should keep their equity holdings even after yesterday's market sell-off given the outlook for economic and earnings growth, according to strategists at UBS AG, JPMorgan, Chase & Co. and Citigroup Inc.
Global indexes followed a plunge in China's stock market yesterday on concern that the government in the world's fastest-growing major economy will tighten controls on investment. Morgan Stanley Capital International's World Index tumbled 2.5%, its steepest loss in almost four years. „Following a long, correction-free rally in equity markets, the move appears more technical than fundamental,” wrote Darren Read and Larry Hatheway of UBS's global asset allocation team in a report distributed today. „We use this opportunity to add to our equity overweight.” Equity markets around the world have risen almost without interruption since March 2003, except for a sell-off in May and June that prompted the MSCI World Index to drop as much as 12%. The decline at the time was triggered by concern that the US would continue with its series of interest-rate increases. The Federal Reserve last raised borrowing costs in June. The Dow Jones Industrial Average and the Standard & Poor's 500 Index in the US yesterday tumbled more than 3%, erasing their 2007 gains. Europe's Dow Jones Stoxx 600 Index fell 3%, the worst performance since May 2003. Even with yesterday's drop, the MSCI World has more than doubled since March 2003.
„The market was definitely overbought and due for a correction,” said Mislav Matejka, head of European equity strategy at JPMorgan in London, in an interview. Matejka was in December the only European strategist among about 20 polled by Bloomberg News to forecast losses for regional stocks in 2007. „Unless the fundamental outlook changes, this is not the opportunity to sell aggressively,” he said. Chinese stocks rebounded today after official media reports said the government won't impose capital gains taxes on stocks and will allow overseas investors to buy more domestic equities. The Shanghai and Shenzhen 300 Index advanced 3.5% after slumping 9.2% yesterday. Futures on the Dow average expiring in March added 100 to 12,280 as of 10:44 a.m. in London. David Bianco and Thomas Doerflinger, New York-based US strategists at UBS, today reiterated a forecast for the S&P 500 index to end 2007 at 1,500. That would amount to a 7.2% advance from yesterday's close. Nothing justifies „the magnitude and breadth of the pullback,” wrote the strategists in a report. „We view this dip as a good buying opportunity.”
Patrick Mohr and Ryoichi Naito, Tokyo-based equity strategists at Nikko Citigroup, share the optimism. The unit of the largest US bank researched the 20 steepest one-day drops for Japan's Topix Index since 1990, and concluded that the benchmark climbed an average 3.5% in the five days following the initial retreat. „These purely quantitative results support our qualitative assessment that this latest sell-off represents a healthy correction in the midst of an ongoing uptrend in global equities,” the strategists wrote in a report to investors today. They cited economic growth worldwide and takeovers among things that will underpin global stocks. The Topix fell 3.2% today. (Bloomberg)