Saturday, Nov 28, 2015

Dubai: Amid a free fall in oil prices, investors in the UAE should opt for a balanced portfolio geared towards risky equities, a senior official at Julius Baer has urged.

Speaking exclusively to Gulf News on his field visit, Christian Gattiker, chief strategist and head of research at Julius Baer said investors must make maximum use of deflationary environment, and accordingly design the portfolio.

“It makes sense to hold a mixed portfolio of fixed income and equities. When we look at the world at the end of 2015 and the start of 2016, we are somewhere in deflationary territory, so prices are under pressure. Equities should be there to benefit from positive risks and in the negative sense, you may want to hold fixed income assets mainly in matured markets,” Gattiker said.

About a decade ago, investors held commodities, gold and emerging market assets to benefit from inflation. Gattiker said the deflation mode “calls for holding matured market assets in particular and in between equities and bonds”.

Gattiker advises investors to go into the old economy, such as consumer companies in the US and Europe take advantage of higher disposable incomes, and home builders or companies, which have a large share of domestic exposure to the US. Julius Baer likes retailers, domestically driven media among others in the matured markets.

“Technology and health care are attractive for local investors to balance the commodity cycle,” he said.

Distinction

Julius Baer has a clear distinction between the US and European equities. The US, according to Gattiker, is 2-3 years ahead in terms of the economic cycle.

“The repricing has taken place there in large extent, that means low quality is rather expensive in the US, whereas high quality stocks such as technology and health care companies are trading at a decent valuations. In Europe, some banks, and low quality stocks are still trading at a major discount. In the US, Julius Baer is buying growth, and in Europe the firm is buying financials, banks, media, insurance which were battered by the financial crisis,” he added.

Gattiker expects a muted rate hike cycle, and therefore he finds fixed income attractive. He expects the Fed to redraw the path it adopted in 1997, when they hiked rates and then had a gap of 2 years, before cutting rates.

Asia

India and China are the most preferred markets, where he senses major buying opportunity. Asia’s largest economies such as India and China have been continuing to benefit from lower commodity prices. Emerging markets such as Vietnam still have value, but others such as Malaysia and Indonesia would suffer from lack of demand from China.

Historically, the US dollar has weakened after the rate hike. Investors have been buying into the US dollar, until they got clarity on the rates, and then they sell-off.

“The latest reading of the labour market is calling for rate hike. The big question is this is the first rate hike and when it will happen next, and we don’t think this is the start of a major rate hike cycle, so this is completely different from what we saw 10-12 years ago. The Fed will then realise that the rest of the world is in deep trouble and then we will see some cooling of the US economy as well,” he said.

The US Federal Reserve is on course to hike rates for the first time in nearly a decade on the back the recovering US economy.

“The expectation of capital flowing out of emerging market to developed market was the main market driver in the whole on 2015. The ECB has been placing market for further easing. With European markets, one of the major suppliers to emerging markets when it comes to capital goods, this has serious repercussions on Eurozone export demand,” he said.

Lower commodity prices

The main concerns are that a higher dollar means lower commodity prices, and that would mean pressure on Gulf countries and Gulf economies.

“We would hardly see $60-70 per barrel in oil, and the new normal would be $40-50,” Gattiker said, adding, “this would be very very explosive mix, if the US Federal Reserve tightens in every meeting next year.”

“It’s burden for the economies in the Gulf, but it’s a burden that wouldn’t increase in the next year,” he added.

Gattiker expects more downside in crude, and said it is not the end of the world. He said this provides a good buying opportunity in the next 12-18 months.

By Siddesh Suresh ?Mayenkar Staff Reporter

Gulf News 2015. All rights reserved.