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Surfing the wave of worry
Europe offers a port in the storm
Event
Yields on US 10 Year Treasury bonds fell below 3% at the start of June,
largely on concerns the US recovery has stalled.
Impact
Recent economic data in the US has been weak, partly as a result of supply
disruptions and ongoing bad weather. Our US economist, Rebecca Hiscock-
Croft believes the weakness will prove temporary. With the Fed continuing to
support jobs growth, and inflation expectations contained, we look for low
interest rates for longer, which should sustain downward pressure on the US
dollar and help contain borrowing costs. These factors are also likely to
provide ongoing stimulus to the US economy.
Investor concerns about global growth are reflected in the US bond market,
where 10 year Treasury yields are below 3% at the start of June. Coupled
with the recent outperformance of defensive sectors and the strength in gold
prices, it appears investors are looking for relative safe havens.
Despite Europe’s debt problems and concerns about slower US growth, there
has not been a dramatic increase in volatility. On the back of similar concerns
last year, the VIX index rose to 46 in May 2010. But the VIX now stands at 18,
and has been ranging from 16 to 18 since early May. In other words, the VIX
does not signal a dramatic rise in equity related risk.
Historically equity returns are mixed at this time of the year, and given the
current growth concerns, markets will continue to mark time until August.
Outlook
Europe offers a port in the storm, in our view. Markets are already pricing in
interest rate rises in Europe, well ahead of the US, and this is a good sign for
equities as it is a sign of Europe’s improving growth prospects.
The Macquarie Country Alpha Model also highlights the value on offer in
Europe. Our European strategist Matthias Joerss favours France and Italy,
but our country model suggests Germany and Spain are more likely to
outperform, largely due to strong earnings momentum. We particularly like
European stocks leveraged to the growth in emerging markets.
US equities look to be around fair value, with an equity risk premium of 5%
compared to a 3% yield on bonds. That said, while the US market does offer
positive alpha, we see more value in developed European markets.
Risk levels generally rise at this time of the year, which has historically caused
emerging markets to underperform. If this scenario were to play out again this
year, it would provide good buying opportunities in attractive emerging
markets, notably Korea, and to a lesser extent, China.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Surfing the wave of worry
Europe offers a port in the storm
Event
Yields on US 10 Year Treasury bonds fell below 3% at the start of June,
largely on concerns the US recovery has stalled.
Impact
Recent economic data in the US has been weak, partly as a result of supply
disruptions and ongoing bad weather. Our US economist, Rebecca Hiscock-
Croft believes the weakness will prove temporary. With the Fed continuing to
support jobs growth, and inflation expectations contained, we look for low
interest rates for longer, which should sustain downward pressure on the US
dollar and help contain borrowing costs. These factors are also likely to
provide ongoing stimulus to the US economy.
Investor concerns about global growth are reflected in the US bond market,
where 10 year Treasury yields are below 3% at the start of June. Coupled
with the recent outperformance of defensive sectors and the strength in gold
prices, it appears investors are looking for relative safe havens.
Despite Europe’s debt problems and concerns about slower US growth, there
has not been a dramatic increase in volatility. On the back of similar concerns
last year, the VIX index rose to 46 in May 2010. But the VIX now stands at 18,
and has been ranging from 16 to 18 since early May. In other words, the VIX
does not signal a dramatic rise in equity related risk.
Historically equity returns are mixed at this time of the year, and given the
current growth concerns, markets will continue to mark time until August.
Outlook
Europe offers a port in the storm, in our view. Markets are already pricing in
interest rate rises in Europe, well ahead of the US, and this is a good sign for
equities as it is a sign of Europe’s improving growth prospects.
The Macquarie Country Alpha Model also highlights the value on offer in
Europe. Our European strategist Matthias Joerss favours France and Italy,
but our country model suggests Germany and Spain are more likely to
outperform, largely due to strong earnings momentum. We particularly like
European stocks leveraged to the growth in emerging markets.
US equities look to be around fair value, with an equity risk premium of 5%
compared to a 3% yield on bonds. That said, while the US market does offer
positive alpha, we see more value in developed European markets.
Risk levels generally rise at this time of the year, which has historically caused
emerging markets to underperform. If this scenario were to play out again this
year, it would provide good buying opportunities in attractive emerging
markets, notably Korea, and to a lesser extent, China.
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