The gloomy mood is likely to persist in the financial markets and the pace of global economic growth will continue to slow, according to Bank Sarasin’s latest Global View investment outlook for the third quarter 2011.
“With the renewed escalation of the euro debt crisis and the surprising plunge in many leading indicators in the second quarter 2011, summer thunderstorms struck the financial markets earlier than expected,” the bank said.
This has dampened expectations. But Bank Sarasin points to emerging market equities, including India, as a ray of sunshine amid the dark clouds. The Gulf region is also forecast to experience robust growth, even if oil prices trend sideways. Beyond the emerging markets, Bank Sarasin favours the energy sector, based on its robust earnings, and otherwise recommends a defensive equities strategy.
Bank Sarasin forecasts that the decline in commodity prices and inflation concerns, as well as relatively strong growth rates in 2H 2011, should have a positive impact on Asia stock markets. The Bank points to attractive opportunities in China in particular, and, after a time, in India. Bank Sarasin forecasts a 20% increase in emerging market corporate earnings in 2011, followed by an additional 10% in 2012, likely to be considerably higher than in the developed economies.
The valuations for emerging markets declined significant in 1H 2011. Compared to developed countries, they are trading at a discount of about 13%, which can only be explained by an unjustifiably high risk premium, given that emerging market countries’ growth should remain robust over the next year. Bank Sarasin forecasts a 20% increase in emerging market corporate earnings in 2011, followed by an additional 10% in 2012, likely to be considerably higher than in the developed economies. The valuation for emerging market equities is attractive in historical comparison. With a price/earnings (P/E) ratio that is a little above 10 (based on estimated earnings for the next 12 months), emerging market equities are trading roughly 10% below the average for the last 12 years.
Higher oil prices and accelerated government spending have helped economic growth in the Gulf region in 1H 2011, despite uncertainties stemming from the political turmoil in parts of the region. However, the first half also demonstrated that higher oil prices do have an adverse effect on global economic growth, even if the effect has diminished in the last decades. Surging oil prices have contributed to the “soft patch” in the US.
The major oil producers in the region need to consider this in the second half of the year. Higher oil prices are certainly desirable from a domestic point of view since increased public spending is needed to assure social coherence in parts of the region. But an increase in oil prices risks choking the global economy. If Bank Sarasin’s macro scenario materializes, the global economy will cool somewhat in the next four quarters. Major oil producers are therefore less likely to push too hard for higher prices, as they understand the economic risk. A sideways trend in oil prices would still contribute to the region’s robust GDP growth.
“A slightly lower oil price could even be positive for the sector since demand will increase if prices fall below $120 per barrel, reviving demand. The energy sector alone shows positive earnings momentum on a global basis, suggesting that energy sector will stand out in 2H 2011, when corporate earnings are forecast to fall,” said Jan Amrit Poser, Head of Research and Chief Economist at Bank Sarasin.