Valens Market Phase Cycle Monitor & Corporate Credit Macro View for June 2016

August 23, 2016

Market Phase Cycle™ Investing Strategy

Catalysts for growth remain absent, increasing valuation and sentiment risk

Equity valuations continue to imply expectations for either a rebound in ROA’, or an acceleration of growth. Investor sentiment also points to growing positive expectations. However, management sentiment remains subdued and investment indicators continue to point negatively, limiting potential for growth upside. Without this growth, bullish investor sentiment and premium market valuations imply potential for downside risk going forward.

Current prices require a recovery in earnings growth that will be challenging without investment or operational improvement

Equity markets are currently pricing in a cessation in corporate ROA’ declines and a return to 2014-2015 levels, with continued subdued growth, and traditional valuation metrics are at the high end of warranted values based on the current environment. However, management confidence indicators again turned down in May, signaling management is not confident about investing in growth, and this is confirmed by fundamental metrics like capacity utilization, aggregate Asset’ growth rates and Net/Gross PP&E ratio declines. Without growth accelerating, valuations appear expensive.

Investor sentiment indicators continue to remain overly optimistic

Investor sentiment indicators are signaling that investors are growing overly optimistic. With investors not focused on risks, markets at the high end of the recent band, and concerns around growth disappointing expectations, the risk of the market retesting the lower end of its range is not unreasonable.

Credit fundamentals are supportive of equity markets, limiting downside risk

Even though valuation and sentiment signal potential risks to the downside for the market, none of Valens’ proprietary credit metrics signal risk of a credit crunch, limiting the potential any near-term selloff could turn into a bear market.

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