The great equities sell-off continues

USA

October began with a broad market rally on Tuesday, but it
proved to be only a brief reaction to a short-term oversold
condition. Subsequently, another round of profit warnings
from AMD, Bank of New York, EMC, and Schering-
Plough, as well as credit downgrades on Alcoa and Walt
Disney sent the market down to multi-year lows. More
evidences on the sluggish labor market also fuelled the selloff.

Investors still face the same issues on sluggish economic
growth, faltering company profits, and the possibility of a
war against Iraq. The anxiety over war could persist to hold back the stock market while its timing is unclear with other factors affecting the geopolitical development.

On the earnings front, the latest wave of negative preannouncements has led to widespread reduction of fourth quarter earnings estimates. Even the more defensive sectors, like drugs and utilities, are affected by lower estimates.

With the U.S. 3Q reporting season kicking off, in view of
the near term downside risk, investors should focus on
consumer-related sectors whose earnings visibility should
offer more investment appeal even the macro picture
deteriorates further.

Such sectors include food & beverage,
household product and personal care segments.
Encouraging cash flow generation, improving return on
assets and margins are supporting positive revisions to
earnings. Industry earnings growth is estimated to achieve
10-11% this year, compared to around 6% for the market.


Europe

Growing worries about deteriorating earnings in the banking sector sent European markets sharply lower, ending a week
of heavy losses. CS Group, HVB Group, and BNP Paribas
fell on mounting uncertainty over their future earnings.
Commerzbank's outlook was reduced by Fitch to 'negative'
from 'stable'.

European equities are in cheap territory based on earning
yield to bond yield ratio. However, merely valuation ground is not enough to propel equities higher as demand for equities remain subdued. A recovery in growth and corporate profit would be needed to spark demands and therefore a sustained bull trend.

Near-term risks predominantly point to the downside as the
economic recovery is still fragile. The 12-month forward
earnings for Europe as a whole are sliding again. Flight to
safety would prompt investors to stay in the consumer sector. The sector would perform as long as economic outlook remains dismal.


Japan

A rally in telecom and technology shares provided some
support on Friday, helping the Nikkei 225 bounce back above the key 9,000 line.

The market would continue searching for a bottom, given the uncertain direction of government policies and the volatility in the U.S. The Japanese government is expected to talk about anti-deflation package some time in the next couple of weeks. In the meantime, market performance would likely be lackluster until government policy initiative becomes clearer.

Certain Japanese companies may probably face intensified
downward pressure over the interim reporting season during October-November, as their own profit forecasts diverge from the current consensus by a big margin. In particular, these companies centered on electronic components, automobiles, and industrial sectors.