Equity markets have rallied over the past month despite soaring bond yields in Europe. Jefferies expects this “bull market in quality” to continue into 2012.
Here’s three reasons why, from equity strategist Sean Darby:
Firstly, the equity markets had earlier sold off during September-October discounting a lot of bad news. Certainly, investors were relatively underweight versus bonds at the end of September. Secondly, the corporate credit markets have not been as badly hit and there are a growing number of instances where the yield on company debt is less than the dividend yield of the company’s shares. Lastly, the equity markets have begun to discount some ‘affirmative action” by the EU authorities, Ironically, conditions in the sovereign credit markets may need to get a lot worse before the authorities introduce more aggressive monetary measures. In one sense, equity investors are already beginning to discount US QE3 and the ECB undertaking QE1.
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