Markets are just beginning to price in the "new normal" of weak growth and a lack of credible policy responses, according longtime bear Bob Janjuah, co-head of cross-asset allocation strategy at Nomura.
“This process has only just begun. It will not be a straight line down, but the secular (bearish) trend for risk assets is, to me, now clear and, with hindsight, this bear leg began in Q2 2011,” Janjuah said in a research note on Tuesday.
Having been bearish since 2006-2007, Janjuah is warning investors not to listen to investment pros who say markets are overreacting and behaving in a “surprising manner.”
Janjuah admits having been over-optimistic himself earlier this year.
“I got greedy. I was looking for one last mini bull-run up in risk as the perfect set-up ahead of the resumption of the secular bear,” he said.
The secular bear market that Janjuah believes markets are currently battling through comprises three phases, and investors, he said, are now in the last act.
“Leg 1 was the nasty bear from the Q3 07 highs to the Q1 09 lows. Leg 2 was the policy-funded rally from Q1 09 to Q2 11. This Leg 3 will, I think, last deep into 2012 and likely beyond,” said Janjuah.
“We are in a balance sheet recession which will take at least 2 to 3 more years to clean up. The cost of capital will keep rising. The outcome is weak trend growth – I feel 1 percent per annum on a 2 to 3 year basis in the balance-sheet-impaired West is the central case," he said.
Claiming that soft patches will be the norm, with no policy cushion against shocks, Janjuah said he believes aggregate real earnings and incomes will stagnate or fall. Janjuah also predicts that defaults by weak firms, consumers and sovereign nations will increase.
“In this world, and using the S&P 500 purely as a risk proxy, I see ‘fair value’ for the S&P down in the 800/900 area. I think we will see these levels trade in the next 12/15 months. And we may even undershoot to levels last seen at the lows of Q1 09," he said. "For this year I still expect – as I have said all year – that between now and end 2011 the S&P will trade, as a low print, in the low-1000s."
With the market focused on QE3, and Federal Reserve Chairman's Ben Bernanke’s much-anticipated Jackson Hole meeting coming on Friday, Janjuah believes pulling the trigger on further unconventional measures will be a major mistake.
“If QE3 [a third round of quantitative easing] comes as a de facto redux of QE2, then this will I feel be a major policy error. It may help markets for few short weeks, but in reality such QE3 will force emerging markets to slow down even harder as such a form of QE3 will simply reignite food and energy price inflation for emerging markets," he said.
“And for the West such QE3 will simply act as an even bigger de facto tax on the Western consumer,” Janjuah said.