Even though oil shot back up to US$50 a barrel yesterday from a 13-year low in January and stocks are rallying, a strategist at the French bank Société Générale is urging investors to take a cautious approach as valuations of equities are high and risks abound from rising interest rates to a slowdown in China.
Xavier Denis, the Hong Kong-based global strategist for the private banking arm of SocGen, said at the head of those risks is the possibility that the US Federal Reserve may continue to raise interest rates this year, choking the supply of cheap money that has helped inflate asset prices since the global financial crash of 2008.
And while China’s economic problems seem to be held in check for the time being, a hard landing in the world’s second-biggest economy can’t be discounted in the next couple of years, he said.
"Global equity markets have recovered from their lows in February after a tough start to the year thanks to receding fears on US and China growth, further easing measures by the European Central Bank and the Bank of Japan and the recovery in oil prices," Mr Denis said at SocGen's offices in Dubai on Wednesday.
“A continuation of the rally would require stronger economic data and improved earnings momentum given global equities’ expensiveness at present. Over the past months, most valuation metrics have remained expensive with analysts cutting their profit estimates.”
The MSCI All World Index, which tracks more than 2,400 listed companies in 46 developed and emerging countries, has gained just 2.1 per cent this year but price-to-sales, price-to-earnings and price to cash flow ratios, measures of value, remain at multiyear highs. The measure has a price-to-earnings ratio of 19 and a price-to-book ratio of 2, according the latest data on MSCI’s website.
US stocks are especially expensive, Mr Denis said, with the price-to-book value ratio trading at a 30 per cent premium to the MSCI All World Index.
Meanwhile, the price of commodities, especially oil, has rebounded since multi-year lows that were reached at the beginning of the year.
Brent crude has jumped by 80 per cent since falling to lows in February not seen since 2003 amid increasing demand from net energy importers in emerging markets led by China and India, coupled with disruptions to supply.
Despite the rally, however, Mr Denis said supply will continue to outstrip demand and that the current oversupply, at about 1.4 million barrels per day, may not disappear before late this year as Iran resumes exports to Europe, following the removal of sanctions against it.
Additionally, non-conventional oil producers in the US have become more efficient, helping them slash production costs and the move by Opec to freeze production has not yet reduced volumes being pumped.
Global economists, including those at the IMF, have been cutting growth estimates for the world but Mr Denis says that fears of a recession are overblown.
The US Federal Reserve is likely to be less inclined to keep rates low than markets anticipate as the health of the US economy improves. The French bank is forecasting that the Fed will raise rates twice this year.
The strategist advises investors neither to buy nor sell global stocks in general but rather to hold them for the exception of some pockets where he still sees value, such as utilities and telecommunication companies in the US that offer attractive dividends, and European banks that are trading below book value.
The Hong Kong-based strategist also likes gold as a hedge against negative interest rates in Europe and Japan.
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