Investors should buy more stocks around the world because recent declines in share prices reflect too-pessimistic an outlook for earnings, Lehman Brothers Inc strategists Edwina Neal and Joseph Rooney said.
Clients should keep 70 percent of their portfolio in global stocks, up from a previous recommendation of 60 percent, the strategists said in a note to clients. A benchmark index of global stocks contains about 60 percent equities, they said.
Stocks in Europe and Asia slumped this week as the destruction of the World Trade Center in New York and part of the Pentagon in Arlington, Virginia raised the prospect the US will slip into recession. US stock trading has been halted since Tuesday.
"Equities are priced for something akin to a 25 percent reduction" in earnings over the next 12 months, the strategists wrote in a note to clients.
"Although we see further earnings disappointments to come, a decline of this order of magnitude looks excessive."
The note is not a reaction to Tuesday's attacks, even though the 538-word report from Neal and Rooney, Lehman's London-based chief global strategist, was written after the event, Neal said.
"This is a theme we have been warming up to for a couple of weeks," he said.
Still, Neal said, Lehman will publish a longer note on Monday that says the decline in stocks leading up to and following Tuesday's events means stocks have gone from ``very cheap to extremely cheap.'' The Dow Jones Stoxx 50 Index of European shares has fallen 6.2 percent since the trade center attack on Tuesday. Japan's Nikkei 225 Index has declined 2.7 percent.
Even before the attacks, global stock markets had dropped as economies around the world slowed. The Dow Jones Euro index has fallen 32 percent this year and the Nikkei 225 is down 27 percent.
In increasing their suggested stock level, the strategists also lowered the ideal exposure to bonds to 30 percent from 35 percent and said investors should hold no cash. They'd previously recommended cash exposure of five percent, Neal said.
US stock markets remained closed on Friday and are expected to open tomorrow.
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