Dubai: The antiglobalisation trend could favour small cap US companies as earnings of large multinational companies (MNCs) likely to be impacted by slowing earnings growth from emerging markets because of a potential slowdown in these markets.
Companies that have relied on international cheap labour and companies that are booking lots of profits from emerging markets could face difficulties on earnings front. In the past, many large cap companies managed to boost their earning per share (EPS) through share repurchases. Now with interest rates rising they are less likely to start borrowing and use the proceeds to buy back shares,” David Pinkerton, Chief Investment Officer, Falcon Private Bank, an Abu Dhabi-owned Swiss bank, said.
The proposed deregulation and tax cuts under Trump, there are a number of industries that are going to be supported. Clearly, energy is expected to be a beneficiary. The shale revolution in the US, which expanded the supply of energy, but eventually that industry hit a wall because many companies got overleveraged and came under attack from environmental protection lobby. “Trump is likely to revitalise the sector. The impact of that will be that more oil supplies coming to the market coupled with innovations and technology could pressure on oil prices. Oil will remain range bound,” he said.
Analysts say the macroeconomic conditions in the US is not same as the Regan years. When Regan took over the interest rates were high above 18 per cent. There was a lot of scope for fiscal stimulus and deregulation. That was an explosive macro cocktail to support rising equity prices. Trump does not have that advantage. Equities are already inflated at high valuations compared to historical levels. But they are not typically overvalued compared to how high bonds have been pushed in the past.
While US mid-cap equities are a sure bet, Pinkerton said he has a lot of anxiety about European equities because of the geopolitical factors that are on the horizon. There are threats of disintegration and lack of policy cohesion that is clouding the market outlook. “Despite the promise of policy easing in Europe, investors have not made money in equities. There is more risks to on a potential Brexit contagion. There are more other countries that could eventually demand a pullout from the economic union and currency union,” he said.
The euro has been depreciating against the dollar and it’s expected that it could move to parity with dollar in the near future. A depreciating currency do not bode well for equity investors. But once that depreciation process is complete, these markets offer opportunities.
Emerging challenges
Increasingly some of the emerging markets are facing the situation similar to that of the ‘Taper tantrum’. Now with the US dollar appreciating and the US rates going up, emerging markets currencies are falling against the dollar and that hurts investors.
“We are less bullish on emerging markets, broadly speaking. We are relatively bullish on certain Asian, South East Asian economies where there is vibrancy of demographics and consumerism that are still strong there. But still the key to all these markets is the underlying currency risks. At a point when we see the currency risks are reduced we can buy on fundamentals. If the market still faces currency risks, better stay away because any debasing of currency could wipeout the gains,” Pinkerton said.
Same logic works for fixed income markets too. Emerging markets local currency debt are going to be in trouble because of the currency risks despite the higher yields.
“It is hard to make a generalised statement about emerging market debts as there are good quality credit available in the market, but very often they get packaged together. Thus picking good quality debt from emerging markets need special skills to choose the right offerings in the market,” Pinkerton said.
Oil is going to be a sideways asset and will be largely sentiment driven. As an asset allocator it is virtually impossible to lock in resources on an asset class that is highly volatile.
