Julius Baer: repaso al ciclo económico, a las bolsas, a la renta fija emergente y agricultura

Redacción - Viernes, 27 de Marzo

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INVESTMENT STRATEGY: It’s all about equities

 

• The current market environment leaves limited room for anything but equity exposure. However, current valuation levels might cause some concern among investors.

• We remain very much of the opinion that there is further room left for equities and strongly recommend a substantial equity exposure within portfolios.

 

The current market environment clearly supports our view that equities remain the asset class of choice going forward. Therefore, we are addressing a number of equity-related topics in this week’s Research Weekly. We have made some adjustments to our index targets, reiterate our stance for Asian emerging markets and show a concentrated approach by our technical analysts, i.e. investing in indices, to be successful in today’s markets. Other topics include the Fed’s policy after its last meeting and emerging market bonds.

Until now, we have published so-called fair index values based on fundamental calculations for earnings and valuation levels. Since factors such as sentiment or geopolitical risks did not form part of these models, the actual develop-ment of the index could strongly deviate from these fair values. Our adjusted targets take these factors into account and show that there remains value in equity markets.

 

Emerging markets remain a challenging topic. We recommend investors to stay with the beneficiaries of lower commodity prices, improving current accounts and the generally favourable macroeconomic backdrop, namely emerging Asia. In contrast, Latin America and Europe, the Middle East and Africa (EMEA) are vulnerable to a depreciating currency which coincides with lower GDP growth, weaker commodity prices and a current account deficit. It is not time to bottom-fish in these two regions.  Our technical analysts also remain bullish on equities. The outperformance of small caps indicates a broadening equity bull market.

 

Christoph Riniker, Head Equity Strategy Research, Julius Baer

 

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ECONOMICS: An overview

 

 

 

•       Cyclical divergence among the country groups persists, while the recovery of lagging advanced economies progresses. The cyclical bottoming-out of major emerging markets remains sluggish and challenged economies even show a slowdown.

•       The US remains the leading global growth driver, but its strong momentum has slowed since last autumn.

•       Lower commodity prices and looser monetary conditions are stimulating a growth recovery in the eurozone and Japan.

•       Switzerland is in for a cyclical dent and short-term deflation after the Swiss National Bank abandoned the EUR/CHF floor.

•       The negative output gap in most economies will persist in 2015, given a demand shortage in the advanced economies and weaker growth in major emerging markets.

•       Most central banks are aiming to contain deflation by weakening their currencies, resulting in unexpected measures lately, mostly rate cuts. Negative interest rates are now not only observed in the eurozone, but also e.g. in Switzerland and Sweden. Quantitative easing is on in the eurozone, Sweden and Japan.

•       Monetary policy will remain expansive and the central banks concerned on hold over the medium term. There are risks of more emergency measures, until the relative downward trend in consumer price inflation reverts. However, we still expect the cyclical leaders US and UK to hike interest rates in Q4 2015.

 

 

 

Janwillem Acket, Chief Economist, Julius Baer

 

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FIXED INCOME: Emerging market local-currency bonds under pressure

 

• Emerging market (EM) currencies remain weak due to lower growth outlook and rate cuts by emerging economies’ central banks.

• We still prefer hard-currency debt of corporate issuers with solid fundamentals.

 

Emerging currencies remain under pressure even though the Federal Reserve (Fed) has refrained from signalling an immediate rate hike. Our chart depicts the total return of local-currency sovereign bonds of Asian and Latin American sovereigns. In local terms, the returns are still positive, but for USD investors the returns are negative. Since the peak of the oil price in August last year, USD-based investors have lost more than 20% on holdings of Latin American local-currency sovereign bond. During this period, the Brazilian real lost one third of its value against the US dollar. Losses were not as exaggerated for Asian local-currency bonds, with the index down only 5% since August last year and 15% off their all-time peak in early 2013.

 

The economic outlook in emerging economies remains the major factor behind the EM local-currency bonds’ weakness. In summer 2013, when former Fed Chairman Ben Bernanke had declared the end of cheap money, EM bonds suffered because everyone had expected money to switch back into the US market, and EM central banks raised interest rates to defend their currencies. This time, most EM central banks are cutting rates to stimulate their economies. Therefore, a ‘dovish’ Fed outlook fails to deliver sup-port. With the economic outlook staying weak for Latin America and Eastern Europe, we do not see signs for a rebound anytime soon. Regular readers will recall that we have been focusing on Chinese local-currency bonds to exploit the strength of the Chinese currency.

 

That said, we still prefer EM hard-currency bonds, in particular corporate issuers with solid fundamentals. Preference should be given, though, to exporters that benefit from the currency weakness.

 

Markus Allenspach. Head Fixed Income Research, Julius Baer

 

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COMMODITIES: Recent run-up in agriculture eases

 

Agriculture prices eased overnight after experiencing a week of gains. While a softer US dollar was broadly supportive, dry weather concerns in the United States southern plains saw wheat lead the charge with prices gaining around 5% over the last 5 days. Although corn and soybeans are yet to be planted in the major growing regions, winter wheat was planted last October and has broken its winter dormancy and entering the critical growing phase. Next week, the US Department of Agriculture will release its much anticipated 2015 prospective planted acreage for field crops, including corn and soybeans. Global grain and oilseed inventories remain ample and combined with spring weather, the report will set the tone for grains trading heading into the second quarter.

 

The intentions of American farmers are largely dependent on prices, and in our view, relatively high soybean prices will encourage planting. Subsequently, we expect soybean prices to retreat once more towards their recent lows on mounting supply. We continue to see further upside for wheat and maintain a neutral outlook for corn prices. Agriculture prices should broadly remain at, or below, the costs of production, constraining farmer profits and weighing on investment and expenditure. We expect a protracted bottom in the agricultural cycle to keep prices lower for longer.

 

Agriculture prices eased yesterday after finding solid support from a softer dollar and deteriorating US wheat conditions. We continue to see further upside for wheat and expect soybean prices to retreat again towards their recent lows.

 

Warren Kreyzig, Commodities Research, Julius Baer

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