Global Stocks to Revisit March Lows, Deutsche Bank’s Jones Says

By Patrick Rial

March 31 (Bloomberg) -- The three-week rally in global stocks will end because valuations still aren’t cheap enough to have marked a bottom, while problems with mortgage-backed securities will dog the financial system, Deutsche Bank AG said.

The MSCI World Index has climbed 15 percent since March 9 when it dropped to the lowest since October 1995. The Standard & Poor’s 500 Index, which surged 16 percent in that time, is trading at 14 times earnings, based on 10 years of profits, according to data compiled by Yale University’s Robert Shiller.

The gauge needs to fall below 10 times to achieve a final bottom for a bear market, Brad Jones, a Hong Kong-based strategist at Deutsche Bank, wrote in a report dated yesterday. When the U.S. market crashed in 1929 there were 8 rallies of 15 percent or more before the index reached a final nadir in 1932, said Jones.

“The bottom line is we expect markets to revisit early- March lows again in the early summer,” said Jones, who holds a Ph.D. in international finance from Macquarie University in Sydney. “Long-term students of the market will note ominously that the current cycle is closely tracking the Great Depression sell-off in both duration and magnitude.”

Stocks have climbed this month as investors speculated governments worldwide will succeed in ending the global recession and financial crisis.

U.S. President Barack Obama’s administration’s announced plans last week to rid banks of toxic assets, while the Federal Reserve has joined central banks from the U.K. to Switzerland and Japan in buying bonds to help drive down interest rates and spark the flow of credit.

China Saving China

Investors may be better off focusing on China, Jones said, where the government is implementing a 4 trillion yuan ($585 billion) stimulus package to bolster growth.

“While China should be able to save China this cycle, it is not yet in a position to rescue the rest of Asia,” he wrote.

China’s foreign reserves could benefit commodity producers as the government’s concern over the stability of its Treasury holdings may presage a shift to acquiring assets such as gold, uranium, oil, and copper, Jones said.

Central bank Governor Zhou Xiaochuan this month urged the International Monetary Fund to move toward a “super-sovereign reserve currency,” which some economists say signals the country’s concern about how a weak dollar hurts the value of U.S. assets.

China holds $740 billion of U.S. debt, the most in the world. The country holds only 0.9 percent of its reserves in gold, the lowest among the world’s top five reserve holders, Jones said.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.