Valens Market Phase Cycle Monitor & Corporate Credit Macro View for June 2017

August 4, 2017

<strong>Market Phase Cycle™ Investing Strategy</strong>

More and more fundamental factors point to a growth acceleration

In October 2016, management sentiment indicators started to flag positively, even as the market remained uncertain. This was followed by positive newsflow and earnings upgrades showing fundamental acceleration.

Now, fundamental signs are pointing to management teams starting to invest. Capacity utilization levels are rising for the first time in several years. Share buyback rates have slowed materially as management teams appear to be building capital for more productive uses, specifically growth.

Accelerating investment is a key factor to driving earnings growth that will power market upside.

Investor sentiment has moderated, opening buying opportunities

Short-term and medium-term sentiment indicators, including investor equity allocation, correlation, and fund flows have all remained closer to historic averages since sentiment moderated in April. In a momentum market, this presents a buying opportunity.

Fundamental indicators point to earnings growth and fundamental growth trends that drive a momentum market

Strong management execution is driving forecasts for earnings growth in 2017 and beyond. Growing management confidence about investing in growth is also translating into actual signals of increased investment. The market is pricing in a rebound in ROA’ and Asset’ growth, meaning the market is fully valued, but if companies can deliver on earnings growth, it could be a catalyst for further equity upside.

Credit risk is moderating after having shown reasons for concern in recent quarters

In recent quarters, negative trends in the senior loan survey, debt maturity headwalls for smaller-cap companies, and write-off trends had flagged reasons for concern heading into 2018. However, all these factors have seen improvements in the past two quarters, reducing the risk of a credit-driven equity sell-off.

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