Risk trade may have received a fresh jolt as investors around the world cheered an agreement by EU leaders to contain the region’s debt crisis, but market watchers tell CNBC it’s still too early to assume the worst is over for equities.
J.P. Morgan Asset Management's Head of Investment Services Geoff Lewis says a rally was expected as stocks have gotten oversold in the last few months, roiled by uncertainty over Europe.
“Markets have gotten depressed… so a relief rally is natural at this point," Lewis said. "But it’s a long hard road ahead,” he added, referring in the lack of detail in the rescue plan. While European governments have agreed to leverage the 440 billion euro rescue plan, it’snot immediately clear how that would be carried out. "The devil is going to be in the details," said Lewis.
Still, investors chose to focus on optimism that a financial disaster has been averted by the long-awaited deal. European and U.S. stocks posted their biggest gains in months on Thursday, while Asian shares extended gains for a second day on Friday, rising to their best levels in three years.
But skeptics remain unsure if the rally will last. "You're not going to get this kind of rally every single day, and the market is very overbought now,” said Quincy Krosby, market strategist at Prudential Financial. “In fact, statistically, it's one of the most over-bought markets that we have seen, so expect to see pull-backs."
While Shane Oliver of AMP Capital agrees there could be renewed selling as part of the current market volatility, he thinks now is a good time to start picking up bargains.
"The U.S economy appears to be a long way from the double dip recession many were fearing, monetary conditions globally are getting easier, shares are still cheap and October is often the spring board for market gains into year end," Oliver said in a report.
"I think now is the time to get in,” Uwe Parpart, Managing Director and Head of Research at Reorient Financial Markets, concurred. “I think U.S. equities are inexpensive. The companies other than financials have excellent earnings.”
Another upside for equities, according to Parpart, is the weakening U.S. dollar.
“The dollar on the basis of this so-called European solution is tumbling and the euro is going up. A weaker dollar is always good for U.S. equities, and while it lasts, this is a buying opportunity for U.S. equities."
Time to Pick Up US Blue Chips, European Bargains
Apart from techs, Parpart sees potential in big international companies in the U.S. like Caterpillar and Alcoa that have posted encouraging earnings results.
J.P. Morgan's Lewis believes the indiscriminate sell-off in the markets has also opened up opportunities among European companies. "In particular the sell-off has been concentrated in the low PE, large cap value stocks. So I think for a stock picker now there are good opportunities to start looking through companies that have been very heavily oversold — European companies with good prospects in markets outside of Europe for example."
Emerging markets, which have sold off in the recent "risk-off" environment, could also see better performance as their fundamentals remained strong, Lewis added.