A rebound in economic data, receding deflationary pressures in the Eurozone and better-than-expected first quarter earnings can contribute to an increase in risk appetite among investors. 

## Positioning in EM equities had become very negative


Source: BofA January investor survey, ING IM (January 2014)

## Earnings could surprise on the upside

Uncertainty about corporate earnings could be an explanation for the rather weak markets. However, analysts’ expectations are already very low. According to Bloomberg data, analysts now expect first quarter earnings to decline by 0.9%. At the end of February, this figure still indicated a 2.2% rise in earnings per share (EPS). We do agree that the first quarter figures will not look great due to sluggish economic growth, weakness in emerging market currencies and pressure on banks’ earnings, but an earnings decline looks hard to justify. We therefore expect first quarter earnings to beat expectations – which will support market sentiment.

## Environment for equities has improved

In the meantime, corporate actions continue. Merger and acquisition (M&A) volume in the US in the first quarter was 40% above the level of the same quarter of 2013. Next to that, the increased market volatility of the past months has led to a decline in investor confidence. The bull/bear ratio, a gauge for risk appetite, has fallen back to the lowest level since September 2013. We read this as a positive contrarian signal. Moreover, the flow momentum for equities is still positive year-to-date. Total equity funds see small inflows. Developed market equity funds have stable inflows, especially in Western Europe and Japan, while emerging equity markets are confronted with outflow year-to-date.