Global stocks may face 15% downside, reduce risk assets: BNP Paribas

Global equities may face 10%-15% downside in the coming months as uncertainties will stay with markets and Europe is very likely to enter into recession in 2012, says Emiel van den Heiligenberg from BNP Paribas Investment Partners.

The CIO of tactical asset allocation & balanced solutions notes the European debt crisis hasn’t been solved even after the latest rescue plan was released. European finance ministers agreed to roll out a rescue fund next month, speeding up work to enhance its market credibility while giving markets relief on the debt issues.

“We are actually surprised that the market is not more risk averse at the moment given all sorts of political announcements.” He explains the plan is addressing in the right direction but it is still not enough to stabilise the market and solve the region’s fundamental problems.

Therefore, he believes Europe is very likely to enter into recession next year given the deleveraging of European banking system while the US is also struggling to have growth.

As a result, the CIO has been reducing the holdings of risk assets since September this year, while increasing cash and exposure to relatively ‘safe assets’ such as gold and government bonds.

“Despite interest rates are low but we still think the US Treasuries and Germany government bonds are sensible investments in a shorter term.” The CIO also shared his bearish view on global equities. “In a six-month period, we may see 10%-15% lower than where we are now.”

He explains Europe crisis will continue in the next six to 12 months and keep pressure for stock markets. Year-to-date (YTD) investors have already experienced big swings in prices of many different assets such as stocks, fixed incomes, currencies and gold, adding challenges for investment choices.

“I think the same atmosphere this year will continue throughout 2012,” he predicts.

“In that kind of environment, we will still like to own safe assets.”

Meanwhile, he has increased exposure to gold as believing there is a chance for central banks from developed world to introduce money printing measures in the next six months to support their economies. He expects those quantitative easing steps will further weaken the dollar and the euro, benefitting gold price to hit another new high in the future.

In long term, he still prefers both emerging market debt and stocks given the region’s strong growth and healthy fundamentals despite the firm is cutting exposure to overall equities. He also expects Asia and emerging markets tend to outperform for the rest of 2012 but avoiding to invest in economies which are heavily exposed to the slowdown of the West such as Hong Kong, Singapore, Korea and Taiwan.

However, he said inflation risks remain a challenge in emerging markets if central banks from the US and Europe decide to print more money. “For example, QE2 didn’t boost the US domestic demand but has induced commodity inflation among emerging markets.”


This article was first published on Professional Adviser Hong Kong

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