A note from Performa stated that it is in the process of implementing a tactical portfolio re-allocation on behalf of its clients, to reduce their long equity exposure ahead of a volatile Q4 2012.
“Global equities, especially those in the US, have performed impressively over the past twelve months,” said the note from a firm.
“A number of factors have contributed to the strength, including positive earnings growth, a reduction in the market’s perception of the European debt-crisis risk, and quantitative easing from the world’s central banks.”
However, the firm expressed concern over the absolute levels of equity prices.
“We believe that the market is vulnerable. Many investors have priced in a continual increase in earnings growth, which coupled with equity volatility at the lowest levels in a year, indicates that complacency has set in.
“The market does not seem to be worried about impending risks, such as the diminishing returns of “easy” money; US elections that will determine long-term winners and losers in various sectors along with the pending US fiscal cliff debate and planned or negotiated austerity which could be more extensive than most pundits are calculating.”
Though they stated that the market believes that earnings growth is still achievable for the near future, looking deeper at corporate balance sheets presents a problem.
“A significant part of earnings growth over the past few years was attributable to debt refinancing and the longer-term interest rate trend. As the amount of interest that companies paid on their bonds fell dramatically, the investors multiplied these savings into higher stock prices.
“At present, most companies have little or no ability to benefit from low interest rates as they have already wrung out almost all of the potential savings.“
