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 voided, although the development of oil prices is being monitored closely.
“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,” Philipp Baertschi, Chief Strategist, Bank Sarasin & Co. Ltd, said.
“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.”
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 environments.
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.