Financial stocks tipped to lead market recovery

Stephen van Eyk

Financial stocks will fall further relative to the market during the course of 2008 before leading a market recovery late this year or early next year, according to van Eyk managing director Stephen van Eyk.

Speaking at the research house’s annual conference in Sydney yesterday, van Eyk said the current market downturn is “definitely being financially led and so the upturn will probably be financially led as well”.

“I would think that when financials start to outperform the market later this year it may be a sign that the market itself will start outperforming some time later this year or next year.”

He described the current financially led downturn as “interesting in the sense that financials usually outperform the market in a downturn”.

However, he said earnings of S&P 500 financial stocks “have dropped so far due to all the recent write-offs that the PE [price earnings] is actually going up because prices haven’t dropped fast enough to make up for the drop in earnings”.

“I would say that earnings will continue to drop faster than prices, with the PE going up, and then at some point — maybe late this year [or] early next year — earnings will start going forward again as they build their balance sheets.

“Earnings usually fall for 16 months after a downturn but the market usually starts to rise some time before the end of this period — so really, you would think that the market will start to rise some time later this year.”