Salient to Investors:
The lockstep moves in global stocks that dominated markets for the past 6 years are breaking down at the fastest rate on record, a sign investor confidence is finally returning from the financial crisis.
Fidelity Worldwide Investment said diverging prices accompanied past rallies and is poised to repeat. Diminishing correlation was a Buy signal in 1998 and 2003. Weakening correlations are reducing daily swings in the S&P 500 to the lowest annual level since 1993.
Jose Gonzalez-Heres at Morgan Stanley Alternative Investment Partners said this is the first time we see a persistent trend of declining correlation, so is looking for stocks based on profit growth and takeover odds.
Paras Anand at Fidelity said falling correlations will help the equity prices of the stronger business with attractive long-term prospects, a churn process that is typically positive for equity prices.
Supriya Menon at Pictet & Cie. said lower correlations won’t last because threats to the global economy haven’t disappeared, and there are risks that are not completely reflected in the price of risk assets – given current sentiment, we are ripe for a correction.
Bank of America said 1 in 3 fund managers posted returns that beat the Russell 1000 Index in 2012, versus 1 in 5 in 2011.
The CBOE S&P 500 Implied Correlation Index shows traders are betting the links will keep weakening.
Jason Collins at SEI Investments said weakening correlation indicates investors are less concerned about the economy and believe profits will determine their investment choices. Collins said equity correlation tends to spike in a crisis or distress as macro concerns swamp individual company fundamentals.
Bears say the improvement will be temporary as lawmakers confront March deadlines on spending plans and elections are held in Italy and Germany.
Jeffrey Davis at Lee Munder Capital said investors have become much more aggressive about individual stock selection, rather than looking for top-down trends.
Over 50 percent of institutional investors expect equities to offer the highest returns in the next year, the most since Bloomberg began tracking in July 2009.
Earnings growth is projected to slow this quarter; the IMF lowered its forecast for 2013 global growth to 3.5 percent.
EPFR Global estimate $22 billion flowed into stock funds in the first week in January, the second-highest rate on record.
Over two-thirds of polled investors plan to raise their holdings of equities in the next 6 months: twice as many said the global economy is improving over those saying it is worsening.
Almost 70 percent of American and European companies with market values of at least $1 billion are forecast to post higher earnings for the next 12 months.
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