Global Stocks Will Rally as Prices Hit `Extreme' Lows, RBS Says
By Alexis Xydias
Nov. 28 (Bloomberg) -- Investors should exploit the "extreme
opportunity" presented by stock valuations that have overestimated the
extent to which earnings will slump, according to strategists at Royal
Bank of Scotland Group Plc.
While European earnings may decline a further 18 percent, current
equity prices suggest the market is predicting a 45 percent drop, Ian
Richards and Graham Bishop, strategists at RBS in London, wrote in a
report today. U.S. earnings may contract another 15 percent, they wrote.
"Risk premia have hit extreme, and unsustainable, highs," they wrote.
"This has driven valuations to extreme lows." The price of European
equities relative to trailing earnings may almost double as investors
attempt to anticipate the bottom of the recession, according to the
report.
"We look for the U.S. economy to lead recovery through the second half
of 2009," the note said. "Markets invariably pre- empt economic
recovery and we expect equities to rise substantially."
