LONDON – Two of London's best-known bears said on Tuesday that falling world equity markets were a long way from reaching bottom and predicted misery for stock investors stretching well into next year.
In separate comments, fund manager Tony Dye and Dresdner Kleinwort Wasserstein global strategist Albert Edwards both said the global economic outlook was poorer than most people were predicting and that equities would not rebound soon.
Both men were among the first to warn that the Internet bubble of the late 1990s was due to burst and bring with it tears.
Dye, the former investment boss at Phillips & Drew who now runs his own firm, told a hedge fund conference in London that fair value for stocks was probably around 60 percent of current levels despite a nearly two-year correction.
"The question is at what point we reach this fair value," said Dye, whose nickname in British financial markets is Dr. Doom. "If it is in the next six months, it is going to be very awful. If it takes longer, medium-term returns on equities are going to be very low over the next five to 10 years."
Edwards, whose research talks of an "Ice Age" of low inflation dragging on corporate earnings, said equities had failed this year to take advantage of a relatively good economic climate that was now waning.
"The equity market has had the best position it could have...and those conditions are going now," Edwards told Reuters.
He was speaking as DKW released its latest global investment strategy which told institutional investors to cut their holdings in equities in favor of cash.
DKW chopped its previous underweight equity allocation recommendation of 47 percent to just 40 percent. It left bonds at 43 percent and raised cash allocation from 10 percent to 17 percent.
AGAINST THE TIDE
Although many analysts and fund managers have lowered their expectations for equities this year, the bearishness of Edwards and Dye flies in the face of a general view that markets are near bottom and a rally is due.
A series of recent polls conducted by Reuters showed widespread expectation of second-half stock rallies, primarily based on a return of U.S. corporate profitability.
Wall Street strategists saw the Standard & Poor's 500 index ending the year nine percent higher than at end-2001, implying a 24 percent gain for the next six months.
Tokyo analysts saw Japanese shares rallying into 2003. Even euro zone analysts, while admitting their bourses will end down year-on-year, saw a rise from current levels.
Edwards and Dye, however, said an improvement in corporate earnings was not likely to come through soon and the post-bubble shake out had still not ended.
Dye said capacity utilization in the U.S. economy, an indication of pricing power and corporate profitability, was at at its lowest since the early 1980s.
Edwards said the DKW's own leading indicators were suggesting that "this is an unusual earnings and economic cycle and things are actually turning down."
The two men have a track record of correctly predicting stock gloom.
Dye warned for years that a bubble was developing in the stock market but his prophecies of doom were not believed.
Edwards warned in early 1999 about overvalued technology stocks, describing the final days of the boom as "like running up the Himalayas without oxygen."