U.S. stocks are attractive, even after Standard & Poor’s stripped the world’s largest economy of its top credit rating for the first time, because the companies are inexpensive and have global reach, Barclays Plc (BARC) said.
“Don’t join the crowd and try to pile out,” Hans Olsen, head of Americas investment strategy at Barclays Wealth, said in a telephone interview yesterday. The unit of the London-based bank oversees 170 billion pounds ($279 billion). “Valuations and earnings power are still there, that’s for sure, and those who can should hold with their equity positions,” he said.
S&P cut the nation’s AAA credit rating for the first time, criticizing lawmakers for failing to reduce spending or raise revenue enough to reduce record budget deficits. The S&P 500 Index (SPX) fell 2.3 percent to 1,172.19 as of 10 a.m. in New York, following a two-week rout that dragged the benchmark gauge down 11 percent and erased its 2011 gain.
U.S. stocks won’t be impaired by the cut because companies can expand their profit margins as they access global markets even as the economy slows, the New York-based strategist said. Investors aren’t likely to abandon the country’s equity market because stocks are inexpensive using price-earnings ratios.
“American companies have earnings power because they have depth and reach of where their products are sold and they have margins because they’ve been absolutely laser-like in their focus on margins,” he said. “Those revenues translate into earnings, and the price that you pay for those revenues and earnings is on the lower end of what it’s been over 10 years.”
The S&P 500’s valuation has dropped to 13.1 times profits in the last year, the lowest level since the month the bull market began in 2009, according to data compiled by Bloomberg. Concern about weakening economic data has overshadowed an earnings season that has seen per-share profits grow 18 percent and sales increase 13 percent at companies in the measure that reported second-quarter results since July 11.
“Longer term, the global economy is still growing, albeit slowly,” Olsen said. “This probably will cause companies to be even more ruthless in their cost-cutting to protect profit margins -- and as a result, one could remain constructive on profitability.”
Barclays is reaffirming its “overweight” rating on developed-market equities “for sure,” said Olsen, who was hired from JPMorgan Chase & Co. last month as the top Americas strategist, a new position managing a team of strategists for the region. Olsen oversees the creation of investment strategies for wealthy clients in the Americas and reports to Aaron Gurwitz, the chief investment officer for Barclays Wealth.
‘Stay In The Ring’
“They’re cheap and they’re supported by their earnings,” Olsen said. “Even if the earnings were to get a bit of a haircut, these valuations still support those earnings.”
Barclays is reaffirming its recommendations, although the rating cut will boost stock-market volatility, he said. Investors have had “a dreadful two weeks” and some investors who have “bad-news fatigue” have decided to sell stocks because they want to wait until markets calm before investing again.
“Short-term, it’s going to be like being a boxer in the ring: You’ll be jabbed and crossed by this information,” he said. “The key will be to just stay in the ring.”