Risk-On, Stocks Could Hit New Highs: Strategist

Equity markets are set for another risk-on phase following Washington’s last minute agreement on raising the debt ceiling, according to Mike Lenhoff, chief strategist at Brewin Dolphin Securities.

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“We have made the point several times that, while equity markets have had every opportunity for a selloff, they have been reluctant to cede much ground,” said Lenhoff in a research note.

“Equity markets have gone nowhere at a time when the global recovery has lost momentum. Yet the earnings story is positive. In the US for example, where two thirds of the S&P 500 has now reported, the ratio of beats to misses on earnings is four to one and significantly, expectations for top line as well as bottom line growth for the quarter has been revised up,” he said.

Lenhoff believes the yields on offer in the bond markets, including below investment grade higher yielding securities, indicate why it pays to be in stocks.

"Relative to bond markets, be they inflation-linked or conventional government debt or high grade or high-yield corporate debt, equity markets offer incomparable value for the life of the alternative series available,” said Lenhoff

Equity investors according to Lenhoff need some space to reflect on the fundamentals after months of worrying about the euro zone crisis, and the removal of the threat of the debt ceiling not being raised in the US should offer some help to the bulls.

“Given their valuations, a shift out of the bond markets could help equity markets not only return to their previous highs but also take them higher,” said Lenhoff.