It may be a little early, but spreads are closing for stocks

Written by Demosthenes Triga

In fact, if I were to project myself on what the trend might be for the rest of 2023, I would be a lot less optimistic than I was for the first eight months of 2023. In particular, the market, especially in the first half of 2023, was going up a wall of anxiety, While over the past month or two, market participants have begun to view this with greater optimism. But what will happen to the remaining third of 2023 for the US market, which determines the direction on the chessboard in the global stock market?

The vast majority of investment houses and strategists were not far off in their forecasts for the first eight months of 2023, seeing a recession just around the corner. However, not only has recession not arrived, growth is continuing at a very satisfactory pace.

The model is the forecasts of the US Federal Reserve, specifically Atlanta (with very high historical accuracy in its forecasts), which publishes its estimates after every important macroeconomic announcement, estimating that the GDP for the third quarter will be strengthened by + 5.9%! It’s clearly very early, as we’re about two-thirds of the way through the quarter, but it’s hard to think a recession is just around the corner!

On the other hand, inflation has fallen to 3%, but the next step, getting closer to 2%, which the Fed wants, is expected to be really wide range!

In this context, it is a good opportunity to trust the fundamentals. More specifically, when the risk premium is relative to the historical average. The risk premium approximation is defined as the difference between the asset’s return and the risk-free rate (10-year US bond).

An alternative measure of the risk premium comes from Nobel Prize winner Robert Shiller, who measures the excess return over the CAPE (excess return over the CAPE). In other words, while CAPE (cyclically adjusted price to earnings – P/E) is an absolute valuation measure, CAPE excess return is a type of risk premium that helps predict the relative performance of stocks/bonds. CAPE Excess Return = (1/CAPE) – Real Bond Yield.

Excess return on CAPE has historically been a good indicator of future real returns. A higher excess CAPE and a correspondingly cheap CAPE led to higher real returns, while a lower excess CAPE and a correspondingly expensive CAPE led to lower returns.

At the current stage, we are in Phase 2, with CAPE above 30 and trailing CAPE marginally above 2% (August data expected to test 1.9%)! Over the past 123 years (1900 to present), there has been an inverse relationship between real return and CAPE valuation, as shown in the chart. It basically translates what stock investors know, which is that the less you pay for a stock, the greater the future return and vice versa. The average CAPE excess return over the past 123 years is 5.3%, while the average return over the past 23 years is 2.95%.

In conclusion, the anxiety about buying stocks should be reflected in the risk premium, as the more or more uncertainty there is, the higher the risk premium will theoretically be to compensate the investor for owning the stock! So, with the excess return on CAPE approaching less than 2%, it’s almost time to reduce exposure to stocks!

The above thinking is clearly not a short-term trading strategy, but rather a medium-term tactic, as the risk premium can persist for several months before it starts to rise again. Yes, we may see new highs in the S&P 500 as it is only 4.5% away from recent highs, but spreads are tight! Finally, this year has shown that if the greatest sin in investing is arrogance, the markets are there to bring us back into order and teach us humility.

Dotsof: Another introduction to the alternative market

Dotsoft has listed its shares on AA’s ENA. Raising 2 million euros, the objectives of the investment program are to enhance the company’s liquidity to cover its future needs for the equipment needed to implement projects, experienced employees, and the infrastructure for its new offices, and to enhance liquidity to implement purchases in equipment from abroad to achieve better prices and a greater profit margin in implementing projects.

Dotsoft is a software and applications production company specialized in the development of integrated information systems, which, among other things, covers the needs of public sector entities and the wider public sector in Greece, private companies, European organizations and entities, as well as other entities of foreign countries. The average duration of project contracts currently implemented by the company ranges between 6 and 12 months.

The company’s clients currently include more than 125 local government organizations. The company has also gained a large number of clients from international and European services with charitable purposes and activities to promote sustainability and social responsibility at the global and European level respectively. In particular, the percentage of public sector projects reached 76% for the year 2022, international projects 13%, and private sector projects about 11%.

The company’s sales for 2022 reached 3.8 million euros, EBITDA profits were 1.1 million euros, while net profits were 0.73 million euros. The number of shares listed on AA’s ENA reached 3,120,000 shares (520,000 new shares were made available via private placement), with an entry price of €3.85 per share.

Finally, the company’s valuation based on its price-to-earnings (P/E) ratio is 16.5 times trailing 12-month earnings, while its EV/EBITDA ratio is just 8.9 times operating. Earnings (EBITDA). Compared to the majority of listed IT companies they are trading at a significant discount, at least on an EV/EBITDA basis, while marketability still looks very limited.

Triple-digit returns remain at 8 months for Aegean, Synergy and Piraeus

August closed for GDT with a loss of 1.7%, while the performance over 8 months remained excellent, +41.2%. The highest returns for the eighth month, as in July, belong to Aegean Bank (+150%), Synergy (+134%) and Piraeus Bank (+122%). At the opposite end were TERNA Energy, OTE and EYDAP, with -18%, -5% and -3% respectively, the only companies with a negative 8-month signal.

The majority of stocks that make up the FTSE Large Cap Index fell in August, with Piraeus Bank, GEK Terna and PPC posting the biggest losses of -7%, -6% and -6% respectively. Conversely, Biohalco posted big gains in the FTSE Large Cap (+6%), Jumbo (+5%) and Autohell (+4%).

At the index level, the picture was mixed, with only four sectors ending August with gains, led by Technology, Personal and Home Products, up +5.3% and +4.9% respectively. On the contrary, apart from the financial sector with -8.3%, the utilities (-5.6%) and trade (-4.3%) sectors also recorded a significant decline.

Among the most prominent sectors in the eighth month were the financial services sector with a +91% (mainly due to MIG) and industrial products with +83%, while only the telecommunications index showed a negative sign (-5%), while the OTE index was the main suspect!

Among mid-cap stocks in August, Epsilon Net stood out with +18% and Intracom with 8%, while the negative hero was the Hellenic Stock Exchange with -8%.

Finally, the average daily trading value of AA in August reached EUR 103 million, boosted by 82% compared to August 2022 and 10% compared to July 2023, while the 8-month average closed at EUR 106 million.

Agenda (9/5/2023 – 9/10/2023)

All eyes are on the DBRS’s decision on the country’s creditworthiness

today After the market closes on Tuesday, Fourlis is expected to announce financial results for the first half of 2022, while Evrofarma and Frigoglass have held regular general meetings. On Wednesday, EYDAP and Tzirakian Pipe Works called an ordinary general meeting, while Biocarpet called an extraordinary general meeting. With the main issue being the purchase of private equity, Quest announces the financial results for the first half of the year (after the end of the meeting), while ELSTAT announces the change in GDP for the second quarter of 2023. On Thursday, AVE, Agrotikos Oikos Spyros and Attica held Shares and ANEK hold an ordinary general meeting, Athens Medical shares will trade without the right to a return of capital of €0.03, while Aegean Airlines (before the start of the AX market – conference call 17.30) is expected to announce financial results for the first half of 2023 On the same day, negotiations on Foodlink’s right to participate in AMK cease. On Friday, Domiki Kritis, Unibios, YALCO, Proodeftii, Delta Techniki and N. Varveris – Moda Bagno holds an ordinary general meeting, while ELSTAT announces the index of industrial production (July) and inflation for August. Finally, the week concludes with the announcement of the country’s planned rating by DBRS Morningstar late Friday evening. It’s worth noting that DBRS Morningstar has rated the country ‘BB High’, just one step away from investment grade. The next rating is scheduled to be issued on September 15 by Moody’s, which maintains a “Ba3” rating, which is three notches below investment grade.

Four-day trading week with limited macro news

Overseas, in the morning the Caixin Manufacturing PMI for August is announced in China, while in the afternoon the Industrial Orders for July are announced in the USA. On Wednesday, it will be Germany’s turn to announce industrial orders for July, while in the afternoon in the United States the Services PMI will be published based on August data. On Thursday, the Brazilian market will remain closed due to Independence Day celebrations, while the Eurozone announces revised data on the change in GDP for the second quarter. On Friday, it is Japan’s turn to publish the change in Q2 GDP (revised figures), while Germany publishes August inflation shortly afterwards. Early Saturday, China publishes inflation data for August. It is noteworthy that yesterday, Monday, was an official holiday for the American and Canadian stock markets due to the celebration of Labor Day.

* Demosthenes Tringas is a certified stock and market analyst at Beta Exchange – [email protected]

** Copied from Kivalio newspaper