Global equities challenged by growth worries

Although the US economy has given signs of robustness in the latter stages of 2011, investors remain concerned that the unraveling of the Euro zone could ultimately bring a serious setback for the markets, said Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD bank.

He said most indicators of value suggest that global equities are cheap however the challenge to such as view is firstly that equities may have been irreparably de-rated due to their poor performance in recent years and secondly that a serious set-back in the global economy in 2012 could see corporate profits fall much further than the 10-15 per cent discounted today.

“Also bear in mind that if investors want to buy really ‘cheap’ equities they will have to purchase the uncertainty of Euro zone equities. Whilst US equities in 2011 gave a positive total return, it was Euro zone equities that fell back over 15 per cent in Euro terms and 20 per cent in dollar terms.”

Commenting on the bond market, he said global Bond markets face a tremendous wall of issuance in 2012.

Bloomberg estimate that the governments of the leading economies – the G7 have more than $7.6 trillion of debt maturing in 2012. Japan accounts for $3 trillion and the United States $2.8 trillion. At this stage the greatest worry is over the refinancing needs of Italy who rank third in the world with their $428 billion of refinancing much of which comes in the first half of the year. Currencies face another year of volatility.

“We expect that the weight of problems in the Euro zone will lead to downside risks for the euro. Our currency strategists look for the euro to potentially hit 1.15 versus the dollar before the close of the year. The Indian rupee a weak currency for much of 2011 is expected to remain under pressure. The Indian economy remains under strain and although there are some signs of inflation peaking, it remains elevated, undermining international investor interest in the markets,” he added.

Commodities

He predicted that commodities should perform more robustly in 2012 given that the long-term fundamentals in our view remain strong. In 2012 the likely weakness of Western economies should be compensated for by the ongoing growth in emerging markets. Although emerging market economic growth may be less than in previous years, the growth should be sufficient to keep many of the commodity markets in tight supply conditions.

The tightness of supply has been a particular feature of the oil market where prices remained strong even in the face of the weakness of the global economy in 2011. Goldman Sachs forecasts that although in 2012 demand for oil from developed markets will fall 0.25 million b/d, emerging market demand could increase by 1.25 million b/d. A WTI oil price of $115-120 is still very possible in 2012.

Emerging markets

Investors may be nursing their losses but they should not give up hope. With a number of the emerging market economies slowing we expect central banks to react by cutting interest rates. Lower interest rates should be the catalyst for better performance from emerging markets in 2012. In the last three months money flow into mutual funds that invest in emerging market equities have turned positive again which is a positive sign of better absolute performance in 2012. Despite the relatively low valuation UAE equities face challenges in the first half of 2012. The large amount of debt refinancing that is coming due may detract from the positives of the low valuation and still robust economic growth. In the Mena region the Saudi Arabian equity market remains the preferred choice for investment.

Telecoms and food stocks in particular could do well as the benefits to the economy of the significant increases in government spending trickle down to consumers. One of the regions of the world that should rise to more prominence in 2012 is Africa. Remarkable change is occurring in Africa and many investors aren’t aware of it. With economic growth rates that, in many cases, top the world league tables and rapidly falling levels of famine, disease and political chaos, the formerly ‘hopeless continent’ is poised for a three-fold increase in per capita incomes. Small capital markets mean that Africa has much to offer foreign investors willing to become involved in financing mining, infrastructure, urbanization and agricultural programmes.

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