FYI | Jun 09 2006
By Rudi Filapek-Vandyck
Yes, they saw this one coming over at investment bank Julius Baer. In its June strategy update, the bank’s equity strategists report Julius Baer had taken the strategic decision to pull back some of its equity exposure in early May. Immediately after that the world experienced possibly the most severe global correction in equities and commodities over the past half decade.
But there is no need for alarm, Julius Baer strategists report. The bank still expects global economic activity to reach a cyclical peak later this year. The two major global growth engines – US consumption and Chinese investment – are believed to only be set to slow marginally. For those who fear a new bear market is about to begin, the strategists argue a moderate growth slow down in combination with what the bank describes as reasonably-priced equity markets should leave the bear in its cage.
But that doesn’t mean we’re in for a joy ride just yet. Julius Baer believes global financial markets will have to adjust to changing environment and that, as seen every day now, may require some time.
Don’t expect any miracles in the mean time, the strategists say, in fact don’t expect to see share prices bounce in any significant fashion. The strategists believe current market tensions are likely to persist for some time. Meanwile financial market volatility will only increase further over the coming months.
What should investors do in the meantime? Focus on what is important, Julius Baer suggests. Slowing economic growth is undoubtedly a negative for the earnings outlook of listed companies, but it should also relieve upward pressure on global bond yields, and this is positive for equities. So once the whole adjustment process is over and done with, equities should pick up again.
The main thing that should now be feared, Julius Baer believes, is that equity markets start recovering too soon.
For the time being, the bank’s strategist team would advise investors to control risk in their portfolios and stabilise it. And whatever happens tomorrow: don’t lose your nerve. Julius Baer believes large caps are now a better place than smaller cap stocks. Specifically, the bank sees opportunities in the energy and health care sector in North America and would advise investors to avoid highly leveraged places such as emerging markets where liquidation risk looms.
In terms of its global strategy, the bank reports it hasn’t changed a iota since the May correction kicked in and it has no intention of doing so either. Julius Baer is Overweight energy, healthcare and IT stocks in the US. The bank is neutral on other sectors such as resources, utilities and telecom. Banks/financials are the only sector that is rated Underweight. (It’s an interest rate thing).
For those looking to invest in emerging markets, the bank recommendscautioun. Global demand for oil and metals is expected to remain robust and this should benefit exporting countries, the strategists say. Within this framework they see opportunities remaining in Russia and Brazil. Julius Baer believes that Asia represents the better options among the emerging markets, with China, Indonesia and Taiwan cited as offering opportunities.
As far as commodities go, Julius Baer is of the opinion that what we are experiencing right now is purely speculator driven. The underlying positive trend has not been affected, the strategists argue. They note there is some speculation in the market the sector will see a grand correction in the final quarter of this year, first quarter of next year. Longer term, the bullish story remains intact, the strategists believe.
Taking a three month view, the strategists believe equities in the US and Japan are still looking towards more losses, while Europe should more or less stabilise, even though some markets such as Switzerland, Germany and Italy are expected to weaken further.
Spot oil should remain above US$70 per barrel, gold should climb higher, as should do copper, zinc and nickel. For currency traders the message seems to be not to bet on a depreciating US dollar.