Stock markets face a ‘bloodbath’, warns SocGen strategist Albert Edwards

Friday, August 27, 2010
By Paul Martin

Investors should brace themselves for an equities “bloodbath” and a further fall in bond yields when the current excessive optimism propping up the market seeps away, Albert Edwards, a strategist at Société Générale, has warned.

By Angela Monaghan
TelegraphUK
27 Aug 2010

Mr Edwards said there was too much hope among investors, with excessive valuations in the US, but predicted it would come to an end in the coming months as economic data increasingly pointed to a double-dip recession.

“Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst,” he said.

Government bonds, which are considered lower risk assets compared with equities, have remained in demand during the crisis and yields are at a low level by historical standards – where low yields indicate strong demand.

The yield on UK benchmark 10-year bonds was 2.88pc yesterday, and Mr Edwards forecast a further fall to below 2pc. He predicted that “global cyclical failure” would push US 10-year yields down to 1.5pc-2pc, and German bunds to below 1.5pc.

“So far the equity market has shrugged off much of the weaker data that abounds, and has not joined the bond market in a perceptive move.

“The equity market will though crumble like the house of cards it is, when the nationwide [US] manufacturing ISM slides below 50 into recession territory in coming months.” The ISM index fell to 55.5 in July from 56.2 in June.

Mr Edwards forecast a return to the “valuation nadir last seen in 1982″, with the S&P bottoming at around 450.

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