J Safra Sarasin: EM equities to outperform

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Despite a strong US dollar and rising interest rates, emerging markets will be the best performing equity market by year-end, according to Jan Amrit Poser, Bank J Safra Sarasin’s Zurich-based chief strategist and head of sustainability.

J Safra Sarasin: EM equities to outperform

 

 

“The dollar is strong because of rising growth in the US, which will benefit the rest of the world and this will outweigh the negative effect of the rising dollar on emerging markets,” he said during a recent media briefing in Hong Kong. 

Poser expects the US dollar to strengthen amid the bank’s base scenario that the new Trump administration will be implementing a fiscal stimulus, which will create a reflationary environment.

"In 2018, either we will be talking about policy disappointment or we will be talking about overheating in the US economy. Let’s see what happens, but this is the risk for 2018, and for 2017, the reflation [scenario] is well in place"

A strengthening dollar raises worries about the developing world. Although emerging market equities will be impacted in the short-term, they will eventually recover as they benefit from the economic growth and fiscal stimulus coming from the US, he believes.

The reflationary environment will also include higher commodity prices and rising interest rates, Poser said, noting that although the Fed will hike interest rates, it will do so at a gradual pace.

The bank expects two more interest rate hikes this year and another three in 2018, he added.

For investors who are concerned about the risks coming from an overheating US economy, Poser said that those are worries for 2018.

“In 2018, either we will be talking about policy disappointment or we will be talking about overheating in the US economy. Let’s see what happens, but this is the risk for 2018, and for 2017, the reflation [scenario] is well in place.”

A shift in strategy

The current reflationary environment is a shift from what he described as “the new normal” environment, where over the last eight years major economies have amassed huge amounts of debt, which have dampened growth and inflation.

The popular investment strategy had been the hunt for yield, when stocks with dividend yields and government, high yield and emerging market bonds were favoured by investors.

Currently, the bank has shifted from the hunt for yield strategy and has positioned for the reflationary environment, Poser said.

The bank now likes value stocks, high yield bonds and senior loans. In the equities market, it favours emerging markets, Poser said, adding that Russia and Brazil are showing the strongest economic recovery. However, he said he is negative on Turkey because of its overheating economy and capital flight.

He also favours tech sector equities that are linked to disruptive trends, such as virtual reality, artificial intelligence, financial technology and autonomous driving.

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