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12 December 2008
US Equity Strategy
2009 Outlook: Waiting
for the Bail-In
Binky Chadha
Chief US Equity Strategist
(1) 212 250 4776
bankim.chadha@db.com
Parag Thatte
Research Analyst
(1) 212 250 6605
parag.thatte@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Financial markets are pricing in a relatively catastrophic economic scenario
Whether such a scenario comes to pass depends critically on policy.
Recession earnings and multiples
Our top-down estimate for S&P 500 EPS in 2009 is $65 ($73 ex-writedowns).
Underlying earnings (ex-financials-writedown) are forecast to decline -11%, but our
assumptions on writedowns imply modest positive overall growth. We expect the
prevailing uncertainty about the depth and duration of the recession to continue to
exact a discount on the multiple that investors apply to estimated earnings and
use a forward multiple of 13.3 (fair value 15.4) at end-2009.
Historically, equities bottom a little more than half way through recessions
Having priced in a severe recession and the economy in the 13th month of a
forecast 19 month recession, have equities bottomed? Our growth forecasts see
only a modest growth up tick in Q1 2009 and thus imply at best a muddy bottom.
The economic forecast hinges on an improvement in the credit process.
Taking stock of financial sector deleveraging and the credit crunch
Government capital infusions helped lower financial sector leverage to possibly
long-run sustainable levels but the additional Q4 writedowns we expect will raise
them somewhat again; debt capital markets access for financials has been created
under FDIC guarantees but net issuance has so far been modest; the financialsindustrials
intermediation spread has improved significantly but remains negative.
When will risk tolerance return: waiting for the bail-in
A historical perspective suggests vol should subside significantly by early March
2009. From a fundamental perspective, vol has overshot severe recession levels
(VIX around 30%). Hedge fund return volatility has fallen substantially suggesting
investor deleveraging is advanced. The various policy measures to date have
limited the downside tail risk to the financial system and the economy. But a selfsustaining
recovery will require a voluntary bail-in of private capital.
Market outlook, sector and asset allocation
Our EPS estimates and multiples imply an S&P 500 target of 1140 for 2009. In the
near term, having priced in a severe recession but its depth and duration
uncertain, we see the S&P 500 remaining in a wide range of 800-1000. At the
sector level, thematically, we remain overweight US versus global growth, the
importers versus the exporters, the consumer versus capex, and the large banks.
With the S&P 500 having priced in significant bad news, we are neutral equities.
Table of Contents
2009 US Equity Outlook: Waiting for the Bail-In ............................ 3
Uncharted Waters.....................................................................................................................3
Recession Earnings and Multiples ............................................................................................5
Have Equities Bottomed? .........................................................................................................9
Financial Sector Deleveraging & the Credit Crunch ................................................................11
When and How Will Risk Tolerance Return: Waiting for the Bail-In ........................................14
Market Outlook, Asset and Sector Allocation .........................................................................18
Performance..................................................................................... 20
Valuation .......................................................................................... 24
Macro Data Pulse and Drivers ........................................................ 26
Earnings Watch................................................................................ 28
Flows and Positioning..................................................................... 29
Liquidity and Credit Spreads.......................................................... 37
Corporate Issuance.......................................................................... 40
M&A and Buybacks ......................................................................... 43
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