UBS sees signs of capitulation in markets, QE-effects on asset prices will stick

Investors in so-called quality-stocks should be wary, given the extreme divergence in valuations reached versus so-called 'value' stocks, UBS cautioned on Thursday.

Such extremes had only be seen on four occasions since the "growth love-in" high of 2000, including at the end of the tech-bubble and in March 2009, during the Great Financial Crisis, the Swiss broker said.

Over the twelve months after suck peaks, value had clocked in with gains of 20% and quality with losses of 21%.

"In our view, unless we have another big crisis, it would be dangerous to be positioned against this," UBS strategist Karen Olney said.

Added to the above, the Swiss broker's Nick Nelson pointed out six signs that a 'capitulation' was taking place in the market.

Those were: 1) Banks – biggest net selling for close to 5½ years; (2) biggest net selling of Italy since 2014; (3) Hedge Fund net leverage at March 2009 lows; (4) US investors have turned net sellers of Europe through ETFs; (5) highest outflows from US-based equity funds since March 2009 and (6) net selling of cyclicals has hit the highest since August last year, just ahead of the market turn.

But hadn't quantitative easing from central banks lost its power?

As regards the effects of QE on asset prices, through the so-called 'portfolio-effect', UBS strategist Themos Fiotakis judged that it had been responsible for the lion's share of the boost to them.

"The QE impact on market portfolios has had the biggest effect on asset prices. We find that 30% of the decline in G4 bond yields and 35% of the improvement in G4 equity valuations since 2008 can be attributed to the portfolio effect," Fiotakis wrote.

However, given it was unlikely that the growth cycle would be synchronised enough across the G-4 countries for the Fed to meaningfully reduce the size of its balance sheet, then "the portfolio effect of QE in particular is likely to persist", Fiotakis said.

"And this also means that, in the next economic downturn, stocks will likely bottom out at a higher multiple than in past cycles."