The week ahead: Not too stressed

By Natsuko Waki

LONDON (BestGrowthStock) – Potentially robust second-quarter corporate earnings and more clarity on the state of European banks in the coming week should help calm investors stressed by a possibility of a double-dip recession.

World stocks, measured by MSCI, rose almost every day in the past week to a two-week peak, erasing losses suffered in late June after nervousness over European bank stress tests and weakness in the U.S. economy fanned concerns that the world might slip into recession again.

However, sentiment improved in the week as early signs pointed to solid corporate earnings in the United States. Expectations also grew that the stress tests, whose results are due on July 23, are not likely to damage the financial industry.

This has prompted some investors to scale back their overly pessimistic view, although they are not in a rush to buy risky assets.

“In the past three weeks we’ve downgraded our view in order to take into account the deteriorating state of the global economy. But we’re not in a camp to expect a disaster,” said Alain Bokobza, head of global asset allocation strategy at Societe Generale.

“There’s no risk of a double-dip. A double-dip is too risky and that’s not what policymakers want.”

Half of Societe Generale’s multi-asset portfolio is invested in stocks — down from 65 percent in March. Bonds and credit make up a fifth of the portfolio, alternatives 15 percent and the rest is in cash.

Its proprietary economic newsflow data show all indicators point to an expansion of the economy, although China is the only country where newsflow is leveling off.

It expects 4 percent global GDP growth this year, which equals 20 percent earnings growth in 2010 and 2011.

Double-dips are a very rare event, happening just once — 1981 — in the past 90 years, according to Credit Suisse.

Thomson Reuters data shows the average U.S. expansion lasts 38 months, which points that this leg of growth should have between one and two more years to run.

Next week’s earnings include Alcoa (AA.N: ), Intel (INTC.O: ), JP Morgan (JPM.N: ), Google (GOOG.O: ), Bank of America, GE (GE.N: ) and Citi (C.N: ).

Thomson Reuters data shows earnings of S&P 500 (.SPX: ) firms are expected to grow 27 percent in the second quarter from the previous three months, after expanding at a rate of 58.3 percent in the January-March period.

So far, with 26 of 500 firms already reported, 69 percent of earnings are coming above expectations.

‘BBB’ RECOVERY

However, despite all the signs that the world may avoid a double-dip, investors are clearly not persuaded, seeking refuge in safe cash.

In the latest week, money market funds tracked by EPFR recorded an inflow at a 78-week high of $33.5 billion, while equity funds posted outflows of $11.25 billion.

Morgan Stanley says this is because the nature of the recovery is BBB (bumpy, below-par, brittle), as opposed to AAA (ample, abundant and augmenting).

“As long as a recession doesn’t materialize, markets may well be delivering a policy-type stimulus by creating an easing of financial conditions of the kind that central banks would love to be able to recreate,” the bank said in a client note.

“In the near term… yields could stay low or move somewhat lower, keeping financial conditions easy. A recovering economy would find this helpful in further consolidating the BBB recovery.”

(Editing by Toby Chopra)

The week ahead: Not too stressed