Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin
With the renewed escalation of the euro debt crisis and the surprising plunge in many leading indicators in the second quarter 2011, summer thunderstorms struck the financial markets earlier than expected. Bank Sarasin’s latest Global View investment outlook for the third quarter 2011 suggests the gloomy mood is likely to persist and the pace of global economic growth will continue to slow. This has dampened expectations. But Bank Sarasin points to emerging market equities, including India, as a ray of sunshine amid the dark clouds. The Gulf region is also forecast to experience robust growth, even if oil prices trend sideways. Beyond the emerging markets, Bank Sarasin favours the energy sector, based on its robust earnings, and otherwise recommends a defensive equities strategy.
Bank Sarasin forecasts that the decline in commodity prices and inflation concerns, as well as relatively strong growth rates in 2H 2011, should have a positive impact on Asia stock markets. The Bank points to attractive opportunities in China in particular, and, after a time, in India. Bank Sarasin forecasts a 20% increase in emerging market corporate earnings in 2011, followed by an additional 10% in 2012, likely to be considerably higher than in the developed economies.
Emerging markets at historic lows
The valuations for emerging markets declined significant in 1H 2011. Compared to developed countries, they are trading at a discount of about 13%, which can only be explained by an unjustifiably high risk premium, given that emerging market countries’ growth should remain robust over the next year. Bank Sarasin forecasts a 20% increase in emerging market corporate earnings in 2011, followed by an additional 10% in 2012, likely to be considerably higher than in the developed economies. The valuation for emerging market equities is attractive in historical comparison. With a price/earnings (P/E) ratio that is a little above 10 (based on estimated earnings for the next 12 months), emerging market equities are trading roughly 10% below the average for the last 12 years.
Gulf region geared for growth
Higher oil prices and accelerated government spending have helped economic growth in the Gulf region in 1H 2011, despite uncertainties stemming from the political turmoil in parts of the region. However, the first half also demonstrated that higher oil prices do have an adverse effect on global economic growth, even if the effect has diminished in the last decades. Surging oil prices have contributed to the “soft patch” in the US.
The major oil producers in the region need to consider this in the second half of the year. Higher oil prices are certainly desirable from a domestic point of view since increased public spending is needed to assure social coherence in parts of the region. But an increase in oil prices risks choking the global economy. If Bank Sarasin’s macro scenario materializes, the global economy will cool somewhat in the next four quarters. Major oil producers are therefore less likely to push too hard for higher prices, as they understand the economic risk. A sideways trend in oil prices would still contribute to the region’s robust GDP growth.
Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin: “A slightly lower oil price could even be positive for the sector since demand will increase if prices fall below USD 120 per barrel, reviving demand. The energy sector alone shows positive earning momentum on a global basis, suggesting that energy sector will stand out in 2H 2011, when corporate earnings are forecast to fall.”
Political stability will continue to be a key factor for economic performance. Economies with stable political structures, such as Qatar or the United Arab Emirates, are likely to benefit from the heightened regional uncertainty in sectors such as financial services and tourism.
Dampened global economic growth
The two-year recovery phase that followed on the heels of the financial crisis reached its peak in first quarter of this year. Economic indicators in the USA and Europe between April and June recorded a much steeper decline than in previous economic slowdowns. Analysts at Bank Sarasin ascribe the powerful downturn to a special factor: production stoppages of high-tech goods and auto parts after the Japanese earthquake. The international supply chain disruptions are feeding through to Europe and the USA after a time lag of several months. The decline in sentiment indicators in the USA and Euroland appears to echo the dramatic tumble in the Japanese Purchasing Managers’ Index in March.
This decline in sentiment indicators in the second quarter 2011 supports a global economic growth forecast for 2011 of 4.3%, as opposed to Bank Sarasin’s original forecast of 4.8%. Under these circumstances, Bank Sarasin does not see any threat of inflation. With the end of fiscal stimuli, disillusionment is bound to set in during 2012 after the powerful upswing of the last two years. However, analysts at Bank Sarasin do not expect a hard landing for the global economy and also think such warnings for China are exaggerated.
Strategies for lowering portfolio risks
With this economic outlook in mind, Bank Sarasin recommends lowering the portfolio risks by reducing commodity assets and adopting a defensive equity strategy. Bank Sarasin still considers corporate bonds more attractive than government bonds in the coming quarters.
Current investment opportunities in banking and insurance stocks
Bank Sarasin analysts can see opportunities for financial stocks in the current environment. Defensive investors are advised to buy bank stocks which are not directly affected by the Greek sovereign debt issue, such as Credit Suisse, Standard Chartered and UBS. Investors who are more willing to take risks are advised to buy bank stocks, such as BBVA, BNP Paribas, Commerzbank and Société Générale, which have an attractive valuation and can cope with a debt restructuring. Among insurers, analysts at Bank Sarasin favour AXA, Allianz, Munich Re, Baloise and Zurich Financial Services.