In a poll of investors attending Emirates NBD Year Ahead Presentations this past week, it showed a good appetite amongst investors for buying emerging market equities and commodities. However, there were fewer buyers of local equities due in the main the ongoing situation in Egypt, says Gary Dugan, Chief Investment Officer, Private Banking, Emirates NBD.
"There were split views on the dollar. However, we take a more positive view. Until last week it was surprising to see the dollar slide as much as it did particularly against the euro and sterling. If we look at news flow to the US the outlook for the US economy looks significantly stronger than either the Eurozone or the UK. The ECB last week signaled that they were not in any particular hurry to raise rates and hence the Euro came under some selling pressure and the dollar strengthened," Dugan said in a report issued on Saturday.
"We remain upbeat on the developed market equities. However, our view remains more of a short-term call rather than a strong conviction will we see substantial absolute gains. Doubts remain about the sustainability of economic growth. The US economy continues to display all of the facets we have seen in recent months - good industrial confidence however still anemic jobs growth. The ISM surveys of industrial confidence were well ahead of expectations and suggest that the corporate sector remains in good health. The headline ISM manufacturing survey was the highest since 2004, yet despite corporate confidence the numbers don’t point toward significant job creation. The latest employment data, whilst showing a drop in the headline rate of unemployment from 9.4 per cent to 9 per cent, this was only in effect 36,000 new jobs being created," Dugan said.
He said the weather may have a role to play in dampening jobs growth but the employment trend is not a friend of the markets. Note that the percentage of the total population in work is still at the levels of October 2009.
"We continue to express some reservations about the near term outlook for emerging market equities. Emerging markets tend to underperform or indeed lose money for investors when they face a phase of higher interest
rates and generally tightening monetary policy. So far emerging countries have been on a go slow when it comes to raising interest rates. In many countries central banks have preferred to do everything else but raise interest rates. In China the authorities have raised reserve requirements forcing banks to hold low yielding assets rather than lend. In many countries the go-slow from central banks has led to a decline in real interest rates in effect a loosening of monetary policy not a tightening. The ongoing persistence of inflation could force central banks to react in a much more heavy-handed way.
"We continue to view the current Egyptian problems in the context of a global problem of a fundamental deterioration in the lack of distribution of wealth. Geopolitical risk can be hedged in only one way - by buying gold. We reiterate again that the western press are too quick to suggest that the problems are just prevalent in the Middle East when the data shows there are problems in many corners of the world notably in the United States. It was interesting that at the recent Davos forum of world financial leaders that the poor wealth distribution was discussed at some length with notable commentators such as George Soros alluding to the dangers. Egypt is facing up to its problems but many other nations particularly in the West will have to face up to the issues in the coming years in order that social order is maintained," he said.
David Cameron the UK Prime Minister has reflected on the recent student riots in the UK - something not seen since the 1960’s – and seen that at least a part of the reason for the riots is the exasperation in the UK that the government is cutting public services and yet the financial sector seems to want to go back to paying large bonuses to a privileged few. The UK government may again look at raising income taxes on the highly paid and potentially impose further surcharges on the financial sector.
Energy and material stocks performed particularly well last week. Commodity-related stocks dominated the market rally. However, just behind the oil and material stocks were the technology companies showing a modest increase on the week.
"We believe the tech sector to be undervalued and we were looking for the catalyst of upgrades to corporate earnings forecasts before we got particularly excited about the sector. The market is anticipating around 18 per cent earnings growth in 2011. In some regards the expected growth of the tech sector is better quality than the broad market as it depends less on a further expansion of corporate profit margins.
"Commodities were up around 2 per cent with Brent oil up at over $102. Agricultural prices continue to rise with the current weather problems in the United States and Australia only adding to the fears of product shortages. We continue to recommend that investors take exposure to financial products that reference agricultural prices such as Exchange Traded Funds.
"The dilemma for investors at the moment is whether to get interested in the government bond markets of Europe and the United States. For much of December and January US 10 year bond yields sat at around 3.35 per cent and yet over the past 10 days they have spiked to 3.65 per cent.
"Such a yield rise and price fall starts to look interesting to us. Firstly we prefer to buy assets when prices fall, secondly the premise for the rise in yields –higher inflation and strong growth may moderate as we go through the year, thirdly even if growth remains strong the Federal Reserve may start to at least talk about potential tightening of monetary policy which would bring long dated-bond yields down. We are sure that many investors are watching the magic 4 per cent yield level before they buy so it may be worth watching to buy into the market if yields break through 3.85 per cent," Dugan said.