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Growth fears reshuffle the valuation deck again for stocks

posted on April 17, 2013 at 6:50 pm
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Growth fears have hit the market hard again this morning. The International Monetary Fund cut its forecast for 2013 global growth to 3.3% from 3.5%. A warning that debt at China’s local governments is out of control has reminded investors that on Monday they were worried that reports of 7.7% GDP growth in the first quarter of 2013 meant that China’s economy was slowing—or at least that it wouldn’t hit the 8% or better growth that investors were hoping for. Earnings reports from Alcoa (AA), Wells Fargo (WFC), and Coca Cola (KO) showed declining revenue in the first quarter.

But this morning, rather than giving more details on that news about growth, let me suggest what a revival of growth worries means for global markets and valuations.

First, and this may seem perverse, a rise in worries about growth will hit developing country stock markets especially hard—even though growth in those economies is still projected to outstrip growth in the EuroZone, Japan, and the United States. As we’ve seen over and over again in the last two years, when growth fears rise, the first reaction by traders and investors is to pull money out of “riskier” emerging markets in favor of “safer” developed markets. “Safer” may not mean that developed markets climb while emerging markets fall. As Monday’s action demonstrates everything can go down on growth worries. But Monday also showed that when growth worries move to the top of everyone’s minds, emerging markets get hit harder. If you’re looking to raise cash now, keep that in mind in order to get the most bang from any sells. (And don’t forget that emerging market stocks will climb faster and further when sentiment turns.)

Second, with a resurgence of growth fears, stocks that promise steady, reliable growth—and maybe a dividend too—will get a boost. Many of these—McDonald’s (MCD) or Abbott Laboratories (ABT)—have been looking pricey lately and I’ve been thinking about selling on valuation. But in think in a fearful market valuations for perceived safe haven stocks are likely to get more extended. I wouldn’t sell “safety” here as long as the markets are in fear mode. I think this extends to emerging market stocks too. If I were looking to trim emerging market positions (and I’ve been doing some of that in the last week), I’d be trimming emerging market stocks with exposure to commodities, exports, and financials. I’d be holding onto emerging market consumer stocks—especially mass-market consumer stocks. And that group is the first place I’ll go looking for bargains when I think fear has peaked (even if only temporarily.)

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  • eremmell on 17 April 2013

    When the market tanks, the media always has to blame it on something. “Growth worries” this time. I think the real reason this time is this:

  • Leroy_Seattle on 18 April 2013

    I know you wrote a good analysis of the gold market a couple days ago, but what are your thoughts regarding the three mining stocks in your Jubak’s portfolio (SWC, AUY, and GG)? Is it time to sell any of these, or do you think this could be a time to add on to some of those shares? Or just hold and wait on all of them?

  • davcbr on 19 April 2013

    I read the link. IMO all he did was predict that April would be volatile. But if you reread it, I think one can see that his logic [centered on the timing of tax day] was almost precisely wrong.

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