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

August 4, 2017

Market Phase Cycle™ Investing Strategy

Fundamental storm clouds are receding, so news related sell-offs offer opportunity

Political news flow has introduced market volatility, but fundamentals have actually been improving.

Q1 earnings have confirmed market expectations for growth, justifying current valuations. Management teams have also pushed off debt maturity headwalls into the future, reducing the risk of a credit crunch for the coming year and beyond. Lending signals that had been showing reasons for pause have also moderated.

With investor sentiment currently frozen and fundamentals accelerating, the current environment presents a buying opportunity.

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 historical 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 ROA’ recovery and earnings growth in 2017 and beyond. Growing management confidence about investing in growth is a further signal that growth is accelerating. The market is pricing in a rebound in ROA’ and Asset’ growth, meaning the market is fully valued to slightly overvalued, but if companies can likewise 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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