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Boom or gloom?

Two research notes released last week showed divergent expectations of the equities market – one predicting its overvalued nature would soon be reflected in stock prices, and another suggesting Europe was ripe for growth. Can both be right?

Macro valuations for equity markets may dip and swerve like a Beckham right footer, but opposing predictions suggest the current environment makes forecasting particularly difficult.

A report from S&P Capital IQ Equity Research concluded that seasonal weakness in European equities meant investors could buy now and benefit from an expected uptick in the second half of 2013.

The mid-year report suggested it had gathered evidence showing a predicted earnings recovering, based on a view that excess liquidity was still supportive to equity markets - running against common beliefs. The report found that the easing of monetary conditions would add a further 10% multiple expansion for the remainder of the year. Get in quick, traders.

The research team has predicted a break from a clear pattern outlined over the last three years, suggesting that incremental liquidity support was being driven into the real economy rather than via financial market channels. Specifically, the 7% world money supply growth rate seen over the past year would drive market activity over coming quarters, the report predicted.

But this prediction of rejuvenated equity markets is at odds with another research note that emerged last week.

Apparently those involved in financial services foresee a wholesale drop off in equity market activity at the global level, driven in part by Fed chief Ben Bernanke's intention to scale back US quantitative easing.

Bernanke wants to bring the QE program to an end completely by the end of 2014, which has pumped US$85 billion into US markets each month, driving solid performance in recent years. But the very mention of the programme's presumed end shocked markets globally, sending the Dow Jones Industrial Average down 2.3% and causing this year's largest one-day decline for US equity markets.

It's upon these market inclinations that the CFA Society of the UK, which represents some 10,000 investment professionals, believe equities markets are on the wane. The representative organisation's valuations index showed the number of its members that thought 'developed' equities were overvalued had doubled in a year to 47%. Similarly, the number who thought equities as an asset class was undervalued fell to 22% from 39% in Q2 2012.

The swift market reaction to Bernanke's comments means the positive expectations predicted for the second half of the year may have to wait.

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