Global Stocks Rally May Falter, State Street Says

By Chua Kong Ho

April 20 (Bloomberg) -- A rally in global stocks is likely to falter as a prolonged recession dents corporate earnings, according to State Street Global Advisors Inc.

The MSCI AC World Index has surged 27 percent since its March 9 low after lenders from JPMorgan Chase & Co. to Bank of America Corp. said they made money at the start of 2009 and the U.S. government unveiled plans to buy as much as $1 trillion in toxic assets from financial firms. The Standard & Poor’s 500 Index advance in the past six weeks is the steepest since 1938.

“We’re likely to see a pullback in stock markets as earnings disappoint,” said George Hoguet, global investment strategist at Boston-based State Street Global Advisors, which oversees $1.4 trillion. “We are undergoing a severe shock and the global economy will take several quarters to get back to trend growth.”

Profits at S&P 500 companies dropped for six straight quarters through December and are forecast to decline until September. The world economy will contract 1.7 percent this year, the World Bank said last month, while the International Monetary Fund said April 16 the “severe” global recession has “worrisome parallels” to the Great Depression.

“It’s hard for global equities to sustain a rally absent stabilization in the U.S.,” Hoguet, who is also a senior portfolio manager at State Street Global, said in an April 18 interview in Shanghai.

‘Sucker’s Rally’

Mark Jolley, strategist at MainFirst Securities Hong Kong Ltd., and economist Nouriel Roubini share the view that equities are set for a correction.

“Six weeks of consistent gains is typically a healthy medium-term signal for any equity market but is also typically indicative of a market overdue for some consolidation,” Jolley wrote in a report published today.

Roubini, the New York University professor who predicted the financial crisis, said in Hong Kong today the current stock market advance is a “dead-cat bounce, sucker’s rally, whatever you want to call it.” Earnings will “surprise on the downside,” he said.

The S&P 500 advanced 29 percent to 869.60 through April 17 since hitting a 12-year low on March 9. More than $12 trillion in government spending to fix the financial system and revive the economy pushed banks up 83 percent since March 6, paring the S&P 500’s 2009 decline to 3.7 percent from as much as 25 percent.

Investors like billionaire Kenneth Fisher and Marc Faber say gains will continue. Fisher predicted last week that the S&P 500 will rally as much as 70 percent above its March lows, as stocks were cheap compared with long-term interest rates.

Government Stimulus

Faber, who publishes the Gloom, Boom and Doom report, said last week government spending will boost bank profits, lifting the U.S. stock gauge to 1,000 in the next three months.

S&P 500 futures fell 1.2 percent to 856.2 as of 5:12 p.m. in Tokyo, while the MSCI Asia Pacific Index gained 0.2 percent.

State Street added to its “overweight” on emerging market stocks a month ago, said Hoguet. Banks in emerging markets face fewer uncertainties and potential write-offs on asset values than financial companies in developed economies, he said.

The Boston-based firm, the world’s largest money-manager for institutions, is “overweight” Russia, Turkey, Israel and Brazil among emerging markets, and “underweight” China, where first-quarter gross domestic product grew at the slowest pace in almost a decade, Hoguet said.

The Shanghai Composite Index has rallied 38 percent this year through last week, trailing only Peru among 89 stock gauges tracked by Bloomberg.

“I’d be cautious on the A-share market, which has seen a sustained run,” said Hoguet, referring to China’s local- currency stocks. “For China’s rally to continue, we need to see improving macroeconomic data coming not just out of China, but a slowdown in the rate of decline in the U.S.”

To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net