Julius Baer analyst: more pain, before gain

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Avoiding China, India – prefer Russia, Brazil

The credit crunch now experienced in global markets is nothing new and is a cyclical phenomenon that has occurred several times in the past but under different terminology, according to a leading analyst with Julius Baer who forecasts more pain before gain, but nevertheless sees values and opportunities in select markets.
Markus Allenspach, Head Fixed Income Research at Julius Baer, one of the world's largest wealth management firms, told the Financial Mirror in an interview that global markets are currently in a correction phase after a long bull market, which at the top of the cycle saw greed and extrapolation of the up-move as participants became focused on yield enhancement only.
Allenspach, was in Cyprus as guest speaker at an investment seminar organised by Sharelink, the investment arm of SFS Group Pcl (SFS.CY). He described previous cycles as the Asia crisis, the telecom and technology bubble, which saw excessive moves on the upside, which were followed by sharp corrective down-moves.
“The sub-prime crisis was caused mainly by over-investment in housing and shaky financing through bad quality lending by banks that are now rushing to write off losses and seek new capital,” said Allenspach.
He said one way to spot excesses at the top of the cycle in the equity market is to compare the profit growth with the long term growth rate of the company and the market in general.
“When a company is reporting a 20-30% profit growth every year for three years, well above, say, its 20-year average of 8% or the market, then you can feel that such growth is unsustainable and will lead to a decline.”

More pain before gain

Allenspach said the US is in a difficult situation and investors are well justified to seek higher compensation before investing in the US since according to official data, including the OECD, it may take up to two years before US banks may be able to shore up their capital.
According to Bloomberg data, US banks have been more successful in restoring capital than European banks. They took write-offs of USD 162 bln and have already raised USD 141 bln in fresh capital compared to European write-offs of USD 199 bln but only USD 122 bln capital replenishment.
“I believe there will be no major rush to raise capital. Instead, banks will need to produce profits in order to boost their reserves/capital, a process that will take more than a full year and perhaps two,” said Allenspach.

Euro seen lower

Allenspach joins a long list of professionals in forecasting a decline in the value of the euro against the dollar. His target is for the euro to trade at $1.40 to $1.35 by the end of the year, which is still above the PPP value of $1.20.
He sees rising US government bond yields (10-year) rising towards 5% from current levels of 4.08%, which is dollar positive with the Fed and the Bank of England seen doing a better job than the ECB, which is still worried about credibility issues, hence the ECB’s insistance to fight off inflation instead of worrying about growth.

Russia, Brazil

Allenspach said investors are better off to avoid investing in China and India, as he is worried that new regulations and structural problems will be surfacing soon, especially in China after the Olympic Games are over.
“I prefer Brazil and Russia with emphasis on companies active in the domestic market as there will be higher spending by the state and the private sector.”
Regarding property investments, Allenspach prefers actual real estate purchases in the Ukraine and the Baltics as opposed to investing in funds.
He also prefers convertible bonds as a better and safer investment while for high yield bonds, the preference is to wait until later this year when there will be better opportunities.
Allenspach concludes that investors should be on the lookout to seize opportunities and attempt to diversify their portfolio, instead of relying on one market or even staying out, simply to avoid taking risk.