Eurozone growth is likely to surprise to the upside in 2015 and 2016, said Stephen Corry, head of investment strategy for LGT Asia-Pacific.
He said that the low euro versus the US dollar is benefiting eurozone exporters. Moreover, Europe is a huge net importer of oil and the lower prices translate to lower energy costs for many companies.
A third reason is a resumption of lending. European banks had a freeze on lending while they completed their stress tests, which are now done.
“Banks with capital strength will start lending again. Credit growth is picking up in the eurozone and bank lending standards are easing as well.
“GDP growth in the eurozone will be much higher than the consensus estimate of 1% in 2015. Growth will be 2-3%, and that is not priced into the market.”
Contrarian calls
In addition to a buy on eurozone equities, Corry offered other contrarian calls.
One is Chinese equities, which he believes will have a re-rating.
“Even though A-shares and H-shares have performed strongly, institutional managers have not taken advantage of it and are still underweight. This asset class is undervalued and unloved and therefore allocation is warranted.”
With the exception of China and Taiwan, LGT is negative on emerging markets, he added.
Another contrarian call is senior loans. “Given that deflation is now a bigger fear among fund managers than inflation is, it might be sensible for investors to seek an exposure to inflation trades and senior loans in particular.”
Value remains in US high yield corporate bonds, but senior loans could offer an attractive alternative given lower energy exposure and, in the event of defaults, a higher rate of recovery than bonds.
Global risk overplayed?
Fund managers globally are generally risk-averse due to what they see as market euphoria, Corry said. He believes the dominant concerns of managers — a Greek default, the conflict in Ukraine, eurozone deflation and China debt defaults — are already priced in.
Moreover, a large amount of cash is still on the table. The percentage of institutional investors’ holdings in cash is close to 5%, he said.
“Fund managers are high on cash and short on risk and that’s why we’re still positive on equities. Whenever cash holdings are this high, it’s very rare that global equities peak and roll over.”
US – slow but long growth
Corry admitted the global recovery has been disappointing, with progress often hindered. But he said there is no evidence that the US economy is in trouble, which is what some sell-side research has asserted.
“The current US recovery will be longer in duration than past recoveries. The US will subsitute economic growth for longevity.”
The US interest rate hike, if it comes this year, will not be aggressive because two important deflationary forces are impacting the US economy: the strong dollar and low oil prices.
“The combination of those two factors means rates won’t rise sginficantly in 2015.”
Moreover, he said that markets have historically perfromed well after interest rate hikes.
“The S&P has always adjusted higher in the 12 months after a rate rise. There will likely be volatility in the run up to the rate hike. Given the cash level is so high, that will be an opportunity to buy on weakness.”
Europe is Japan in the 1990s
Corry sees parallels between today’s global economic siutation and that of the 1990s, when the US economy was stronger than the rest of the world, the US dollar was also strong and the leading economies had divergent monetary policies.
“The US was hiking rates, Germany and Japan were cutting rates, which was positive for the dollar. That led to a massive investment boom in technology and capex because interest rates were so low. The S&P was pushed up and commodities and emerging markets struggled.”
In the 1990s, Japan’s economy was experiencing deflation. The Japanese had excess savings and they were disappointed with domestic yield so their capital found its way into global markets.
“Today the eurozone could be the equivalent of Japan in the 1990s. Swiss bonds to 12-year tenure are yielding negatively as are German bunds up to six-years, and investors in the eurozone will likely put their money in global markets for better yield.
“The eurozone is desparately short of yield and income.”
