CIO office at Emirates NBD Wealth Management stated in its weekly report that, we see a recurrence of the pattern we saw in the second half of 2012. Last year stocks, high-yield bonds in Europe and emerging markets surged as QE3 was announced by the US Fed.
The Fed has done it again by refusing to implement its own nostrum of ‘tapering’ its quantitative easing (QE) policies this year. In late 2012, the fears of sequestration of the US government budget, the ceiling on US government borrowing and higher taxation of US consumers cast a collective pall on the US equity markets. So emerging markets (EM) surged from September 2012 until May 2013 on the mistaken belief that US dollars would continue to flood into the EM space.
Then came Mr. Bernanke’s infamous ‘tapering’ talk. EM equities and bonds dived through the summer of 2013.
We see a similar pattern emerging in 2013. Clouds are gathering over the US economic landscape with budget talks looming and uncertainty about who Bernanke’s successor will be with the Former secretary to the Fed Larry Summers departure from the running. The lack of tapering last week underlies the markets general disappointment among US market commentators who almost unanimously have decried the refusal of the Fed to reduce QE as irresponsible.
But the Fed was responding to fears that the US government borrowing limit will hit its Congress-imposed ceiling on 30 Sep 2013. If the Republican-dominated lower house of Congress drags its feet to increasing the borrowing limit, we could see a re-run of the mid-90s when several government employees in the US could not be paid their salaries and key installations like air traffic controllers were suspended for months.
Thus, the long-anticipated rebound in US corporate capex spending could be delayed till 2014. This will keep US stock and bond markets range-bound and we would buy the markets on dips in anticipation of a resumption of normalcy late in 2013/early 2014.
Meanwhile global institutional fund managers will start to selectively buy back into ‘cheaper’ European and emerging stock and bond markets which have surged in USD-denominated terms since the Fed refused to taper. We have already seen most of these markets recover up to 75% of their summer 2013 losses, so clients who wish to continue the ‘rebound trade’ are advised to be very selective in doing so.
Our preferred strategy would be to do some spring-cleaning of our investment portfolios as Europe and EM rebound. The general principal we would advocate is to sell into strength long duration bonds, perpetuals and equities particularly in countries that remain financially challenged but where asset prices have surged. We should then use the opportunity to buy into strong businesses paying high dividends and good yields, as well as Government and quasi-government debt in USD here in the MENA region where prices remain robust for gas and oil underpinning local government finances.
In currencies we like buying the Euro versus the USD within a trading range of 1.34-1.37. The rate currently stands at 1.3510. The Euro is the main beneficiary of the ‘no taper’ along with Angela Merkel winning a third term as Germany’s Chancellor through the Christian Democratic Union Party (CDU), which should underpin the Euro’s strength.
In commodities gold rebounded off the initial USD$ 1300 support, we expect the metal to be trading in the coming weeks in the range of $1300 – $1425 ahead of the all Indian Diwali festival where Jewelry demand is traditionally higher. This has been tempered a little with a 15% import tax levied by the Indian government on jeweler. Demand is always higher at this time of the year.
Fundamentally in EM and Southern European structural imbalances have NOT been solved. The continuation of easy money policies merely papers over the cracks in severe financial imbalances in countries which are facing a lack of export competitiveness and over-heated consumer markets.
Source: Press Release