Stick to US and Japanese markets, says Societe Generale Private Banking
With economic conditions deteriorating in the eurozone, Q4 2011 will probably reveal a recession engulfing the entire region, enhancing the allure of US and Japanese markets, argues Societe Generale Private Banking economists.
Although Societe Generale Private Banking (SGPB) is underweight developed markets globally, it has a preference for the US and Japanese markets, it revealed in a report written by chief economist Xavier Denis (pictured) and strategist Kim March.
Its underweight position to equities on the whole is due to its pessimistic views on the eurozone crisis and its potential for resolution.
March and Denis said the strong market rebound in October was just a “temporary blip” noting that “systemic risk continues to increase even as a more massive ECB intervention looms larger on the horizon.
“The greatest risks to domestic demand now stem from the speed of budgetary tightening and job market behavior, which is especially true in European economies.”
SGPB’s defensive allocation to equities means that it is only attracted to companies with limited indebtedness, an international orientation and operating in sectors without pronounced business cycles, and whose valuations lie at or around historical lows.
In terms of sectors, it has a preference for energy which offers appealing returns when considering the dividends paid out, along with health, non-cyclical consumer goods and information technologies, the pair noted.
In terms of fixed income allocations, SGPB is “staying on the sidelines” of sovereign debt due to “low rates of return on even the safest issuers and because of the speculative nature of peripheral European issuers,” they said.
Denis and March have a positive attitude regarding corporate bonds as the economic crisis has highlighted the financial stability of major industrial groups with bloated cash reserves.
The financial situation of issuers continues to be extremely favorable, and default rates are expected to remain low despite a slight rise in Europe due to the poor economic climate, they said.
In terms of currencies, the pair expects the euro to drop further over the coming months, projecting the euro/dollar exchange rate to meet 1.25 over a six month horizon (and 1.3 one year out).
On emerging markets they said they expected equities to be vulnerable to continued downside although better placed to rebound than developed markets when the outcome to eurozone crisis becomes clearer.
Within the emerging markets, they are more positive about China, where they expect growth to remain strong, and Russia, given its stable oil prices and the fact that its inflation seems to have peaked.
With these factors in mind, Denis and March believe a slight upward trend in gold prices could continue, perhaps meeting the symbolic $2000/oz level before the end of 2012.