UAE investors urged to look at developed equities for returns

Growth is poised to continue accelerating as the huge drags from poor energy sector results and the strong dollar finally end

A broker looks at the electronic display boards in the Dubai Financial Market.

A broker looks at the electronic display boards in the Dubai Financial Market.

REUTERS/Ahmed Jadallah

Saturday, Jan 07, 2017

Dubai: For money managers, US, UK and Euorpean equities are the place to go for higher returns.

On the back of expectations that a new administration in the White House would boost US GDP, and thereby positively impact reveunues of companies, the US equity market gauge was on a record breaking spree last month, gaining more than 8.5 per cent since the US elections. Fund managers see the developed markets are a safer investment at the moment.

“The prospects for US consumption remain well-founded on a robust jobs backdrop, characterised by more visibly rising wages, which in turn is helping the appetite for credit to continue to recover,” Will Hobbs, Head of Investment Strategy, Europe, at Barclays said, making a case for investment in US equities.

Even the recovering oil prices would help hold the sentiment.

US company earnings are expected to accelerate after the third quarter earnings rose by a better than expected 4 per cent, the first quarter of growth in over a year.

“Growth is poised to continue accelerating as the huge drags from poor energy sector results and the strong dollar finally end,” the UBS note said.

“The Trump administration’s policies could further boost earnings growth through lower taxes, greater fiscal spending, less regulation, and a steeper yield curve (which benefits banks),” the UBS added in a note.

UBS expects a S&P 500 EPS forecast of 7 to 12 per cent, accounting for the likelihood that some of the new administration’s policies will make it into law by next year.

“Our 2017 estimate may have additional upside but is highly contingent on the outcome of corporate tax reform. We expect growth to remain solid in 2018,” the UBS note added.

Even higher oil prices would aid sentiment.

The oil prices, which recovered more than 128 per cent from its 12-year low of sub-$30 levels, are expected to show an upward move. Prices may move to $70 per barrel, according to Bank of America Merrill Lynch.

“The negative hit from oil prices on associated corporate earnings is fading as is the headwind to profits from the previous ascent of the US dollar,” Hobbs added.


Barclays favour US equities, Europe ex-UK and UK stocks “in roughly that order.” Even UBS has an overweight position on US equities.

“The pick-up in corporate earnings on the back of solid US private consumption and increasing margins supports a continued overweight position in US stocks against high grade bonds,” Hobbs said.

But fund managers are unsure if the signs of inflationary expectations and expansionary fiscal policy is a positive or a threat.

“For now, equities have taken these developments in stride. Inflation holds out the promise of higher nominal growth and of greater pricing power for companies. Time will tell whether markets remain upbeat about these prospects or whether they will begin to view inflation as a threat,” said Mark Haefele, Global Chief Investment Officer Wealth Management at UBS.

“A tipping point could be reached if central banks shift their focus from stimulating employment and growth toward dampening rising prices,” he added.


But overall investors should remember the risks involved.

Amid uncertain economic environment, subdued growth and political shocks, investors are being urged to make their allocation decisions by keeping the political and economic risks in mind.

Investors may want to look at fiscal policies, commodity prices, rich valuations across equities and fixed income, the impact on emerging markets of a higher dollar, change in trade policies, nature of populism in politics, inflation slowly coming back. “There are a lot of themes that we are looking at, so you can be just a passive investor next year because there are so many factors that would impact markets. You need to always be on the move, and re-position yourselves according to new developments.” Nadi Bargouti, managing director at Emirates Investment Bank, said.

By Siddesh Suresh ?Mayenkar Senior Reporter

Gulf News 2017. All rights reserved.

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