While equity markets may consolidate following the powerful rally since the beginning of the year, Bank Sarasin does not expect the euro debt crisis or rising oil prices to throttle stock markets' brighter prospects. In the March edition of its Global Snapshot Monthly, Bank Sarasin predicts that better economic conditions will fuel investors' risk appetites, supporting the continuing shift from low-risk investments to riskier assets. The outlook for equities and commodities, including gold, is particularly good.
While the euro debt crisis seems to have subdued, investors are now unsettled by rising oil prices, driven by events in Iran. The recent 15% increase in Brent crude oil prices is much smaller than the 60% experienced during upheavals in Egypt and Libya and should not be a problem as long as price rises do not impact global economic growth. Because the demand for oil is not particularly strong given that Europe and the emerging markets are at the very beginning of a recovery, price increases reflect a geopolitical risk premium. Bank Sarasin expects prices to fall again if a military escalation in the Middle East is avoided, although the development of oil prices is being monitored closely.
Philipp Baertschi, Chief Strategist, Bank Sarasin & Co. Ltd
"Oil prices aren't going to spoil the party. While there may be a consolidation given overly optimistic sentiment, cyclical upswings and economic recovery offer brighter prospects and will fuel investor appetite. We expect investors, many of whom have been on the sidelines for some time, to return to the market, further supporting equity market rallies."
Since the cyclical upswing in the US and the rest of the world appears more robust than last year, positive macro surprises should lift stock markets further. Brighter earning prospects and valuations support a continuing rally, with Bank Sarasin forecasting another 10% rise before markets reach fair valuation. Although sentiment is too optimistic, which may lead to a consolidation, major setbacks appear unlikely because many investors, who want to increase their equity allocations, have yet to do so.
Implications for Asset Allocation
Bank Sarasin expects funds to move into riskier assets, buoying equity and commodity prices. It recommends overweighting riskier assets while underweighting cash and alternative assets with a money-market component since these are not appealing in the current zero interest-rate environment.
Bank Sarasin has retained its cyclical bias, favouring the Euroland and emerging markets, which are still inexpensive, as well as the technology, consumer discretionary and insurance sectors. Bank Sarasin also favours materials, and chemical stocks in particular. More relaxed monetary policies and rising economic momentum create optimum conditions for commodities, including gold. Emerging market bonds, which are likely to profit from increasing investor interest, are also attractive, although Sarasin has increased credit risk slightly for bonds and maintains very short maturities in its portfolio.
Sarasin - Sustainable Swiss Private Banking since 1841 - www.sarasin.com
The Sarasin Group has its roots as a leading Swiss private bank. As an international financial service provider committed to sustainability, the Group is now represented in more than 20 locations in Europe, the Middle East, and Asia. By end of June 2011 it managed total client assets of CHF 101.6 billion and employed around 1,600 staff. Its majority shareholder is the Dutch Rabobank.
Bank Sarasin-Alpen (ME) Ltd - www.sarasin-alpen.com
Bank Sarasin-Alpen is incorporated as Bank Sarasin-Alpen (ME) Limited in Dubai, Bank Sarasin-Alpen (ME) Limited - Representative Office in Abu Dhabi, as Bank Sarasin-Alpen Qatar, LLC, in Qatar, as Sarasin-Alpen Bahrain BSC in Bahrain and as Sarasin-Alpen LLC, in Oman. These subsidiaries of Bank Sarasin, Basel, Switzerland provide the complete range of Bank Sarasin's private banking services. In addition to UAE, Qatar, Bahrain and Oman, the bank caters to the requirements of private and institutional clients in the Middle East and South Asia.
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