No wonder our market is up this morning: Australia’s Number One bear, Gerard Minack, has turned into a buyer.
Morgan Stanley’s Minack has been well ahead of the economics pack for the past couple of years, warning of the imbalances that were about to bring down risk assets. Just as Crikey’s Glenn Dyer deserves acknowledgement as about the only finance journalist to cotton on early to the impact of the sub-prime problem, Minack has been consistently bearish, particularly on the financial sector, for what’s turned out to be all the right reasons.
But last night the bear turned. He’s not a bull yet, but he is a buyer, saying in his Downunder Daily note to clients:
I think the risk-reward now favors buying risk assets. After Wednesday’s sell-off, I wrote that risk-reward had tipped against maintaining short positions. (Yes, too early!) Now I think, with higher conviction, the risk-reward favours going long.
Minack is not claiming to be able to predict the bottom of the market, but his tough measures of value are saying the risk of buying is now well worthwhile. Furthermore, he believes the disarray in markets is so complete that it can’t be sustained for long.
And being a bear at heart, he has plenty of qualifications on his move to the long side:
The obvious risk, of course, is that in this period of unprecedented volatility even being slightly too early can lead to big losses. The average decline last week for the major stock indices was over 20%. But that’s why I have to put this as a risk-reward argument.
Such a precipitous decline greatly increases the prospect of a similarly vertiginous rebound. There may be a 30% risk of a further 20% decline in equities, but I now think that there is a greater-than-50% prospect of at least as large a rebound.
Having said that, it seems that the single most important driver of markets is now investor deleveraging. A similar sector-specific episode in investment grade credit earlier this year did not produce the big snap-back that I’m expecting for risk assets now, so I admit my call is not risk-free, even over a medium-term horizon.
Finally, I am not saying that we have past the major low for risk assets – particularly equities – in this cycle. We have a potentially deep recession ahead of us, against the backdrop of unprecedented pressure for the financial sector to de-lever. I am saying that anyone but the most bearish investors should consider buying risk assets now.
Yep, those lumps on the bear’s head just might be budding horns.