Lex 2009-08-31

Summer’s over, kids. Mindful that September has consistently been the worst for world equities for more than a century, brokers are producing strategy reports mixing doom with equal parts gloom.

They don’t have to try hard to justify the bearishness with valuations so sun-drenched. Take Asia. On a price to book basis, shares, ex-Japan, have reached the same multiple they achieved in the third and fourth years of past recoveries, points out Citigroup. Since 1975, the compound annual return from Asian equities has been about 11 per cent; so far this year investors have made 46 per cent, or 81 per cent if you annualise it.

Profits have stabilised: consensus forecasts are for 8 per cent growth this year, following a fall of almost a third last year. But that largely reflects the severity of cost-cuts, not top line improvement. Toyota, which has cut domestic production in half so far this year, said last week it was planning to shut an assembly line for the first time in its 72-year history, following a collapse in US auto sales to the lowest level since 1976. Fears over companies’ willingness to spend in the face of subdued demand won’t be brushed off lightly.

Neither can the sheer scale of the contraction in global trade. Japanese July trade numbers last week showed exports down 37 per cent, year-on-year – worse than June – and imports by even more (41 per cent). Hong Kong’s trade data a day earlier, showing exports down a fifth, was nowhere near market expectations of a 12 per cent decline. Shipments to China, the world’s supposed growth engine, fell 15 per cent compared to a year earlier.

Meanwhile, the put/call ratio on the S&P 500 has repeatedly spiked upwards in the past fortnight. September futures on the VIX, a gauge of expected stock swings based on options on the S&P, have leapt in recent weeks, showing that investors are paying up for protection from choppy markets. The nights are drawing in.