The positive effects of the aggressive action taken by the U.S. Federal Reserve and governments around the world is seen rubbing off on equity markets from the second half of 2009 and onwards, according to Henk Potts, Barclays Wealth Equity Analyst.
Speaking at a joint investment presentation organized by the CFA Society of Cyprus and the Financial Mirror in Nicosia on Thursday, Potts who is also a regular commentator on FinancialMirror.TV said the first half of the year is expected to be “very volatile” for equities and all other asset categories.
Potts and Oussama Nasr, Managing Director of DNA Training, were the guest speakers at the CFA Society of Cyprus/Financial Mirror presentation, where they analysed how the credit crisis started, how it is affecting banks and other financial institutions and more importantly, the outlook from here onwards.
Nasr explained how the sub-prime loans were bundled with triple-A investments and then sold off to banks, insurance companies, mutual funds and others, describing in detail how the erosion in asset prices was affecting the reported earnings of companies.
The demise of Lehman Bros. was probably the start of the vicious cycle leading to mistrust among banks who no longer wanted to have counterparty risk on their balance sheets.
“This situation spread to the interbank market leading over-leveraged banks to either seek government help and in most cases stop lending,” said Nasr.
Panic situation
The packed audience at the CFA Society of Cyprus/Financial Mirror presentation heard how panic was now prevailing everywhere and affecting asset prices, with many equities trading at very low valuations compared to last year.
The good news is that the Fed has allowed its balance sheet to grow to $2 trln and President Obama has $787 bln to spend to kick-start the US economy through tax cuts, infrastructure spending and help to the federal states, said Potts.
“The objective is to create 3.5 mln jobs in the US and restore confidence,” he said, adding that a rebound in the US is expected to pull the rest of the world out of recession.
Volatile
The crisis has not ended and there will be more bad news in terms of company earnings and problems by many industries in all countries around the globe, according to Potts, who predicts very volatile and unpredictable market conditions, at least in the first half of 2009.
“The good news is that the equity markets usually trade ahead of the event, which is why I expect a rebound starting to form in the second half, towards the end of the year in anticipation of a much improved business climate in 2010 and beyond,” he said.
“That is why we (Barclays Wealth) are over-weight on US stocks,” said Potts. He is neutral on Japan and extremely cautious on the UK, which is experiencing a major output stagnation, rising unemployment and declining house prices affecting spending.
While house prices have not dropped in Europe to the extent of the drop in US/UK, Potts expects a continued reduction in rates helping the business environment. Nevertheless, he sees better rebound prospects in the US, Asia and even the UK rather than in Europe, which has been slow to respond to the crisis.
Emerging markets
Russia and the Middle East, where equity prices have been hammered to very low levels are among the emerging market favourites of Potts, who sees an investment in both countries as a safe hedge against an increase in oil and commodity prices.
Other favourites include Brazil and some Latin American countries. “Generally, I would target companies with emerging market exposure, who could also become M&A plays.”
Dollar seen gaining
Potts believes the resolute way with which the US is handling the crisis will continue to draw investments to the US, which is why he is bullish on the US dollar, expecting the gains since the second half of 2008 to continue, mostly against the euro and then sterling, where the outlook remains weak, despite the massive decline in value.
Potts remains positive on the Swiss franc and the Japanese yen, expecting both currencies to gain because of limited exposure to toxic assets, even though they operate in very slow growth environment.
Oil back at $70
Potts believes that the oil price, currently languishing at $40 per barrel will stage a rebound as OPEC restraints supply and demand continues to rise. Other factors seen as positive for oil are geo-political issues and possible disruptions to supplies from politically unstable regions.
“I believe a fair price for oil would be around $70/barrel for 2009.”
As for the price of gold, Potts is mostly cautious at current levels, expecting the yellow metal to average $850/ounce during 2009.
