Economics & Strategy
A Cyclical Upgrade
—Sean Darby, Global Head of Equity Strategy
We are turning more positive on developed world equities and further reducing our weighting on emerging markets (EM). We are also tilting our stock and sector recommendations further towards cyclicals and real economy beneficiaries such as domestic capital expenditure (capex) themes in the developed world.
We continue to prefer equities over fixed income and expect the U.S. dollar to remain well bid, the yen to remain weak and EM currencies to soften. While we expect developed markets (DM) to outperform EM, we would also expect Europe to outperform the U.S. We remain bullish on the U.S. and continue to expect the S&P 500 index to reach 1,735 by year end. We expect the market to pass through a significant period of rotation with more focus on U.S. demand themes rather than multinationals and quality issues. Although we like U.S. banks, industrials and domestic capex beneficiaries, we would expect the U.S. to underperform Europe going into 2014.
Investors are underweight European bourses and sentiment is poor at a time when economic data is turning around from a deep recession. Moreover, the tail risk of a euro collapse has been removed by virtue of many peripheral countries running current account surpluses. We have been adding to our weighting in Europe through an upgrade to Germany, a recent higher target price for the FTSE 100 from 6,490 to 6,800, a core weighting in Swiss equities and an increasing tilt towards the European periphery such as Ireland. Once again, we prefer large capitalized cyclicals.
The improving breadth of the Japanese economic recovery and equity market, as well as the turnaround being experienced in the housing and property sector, led us to recently lift our Nikkei target to 15,500 based on a year-end U.S. dollar-yen target rate of 110. We continue to like exporters, as well as beneficiaries of higher wages and real interest rates turning negative. The fact that the Fed discount rate will be unchanged for over a year and that real interest remains negative keeps us positive on Hong Kong (HK) domestic-focused equities. We like companies with port and domestic HK property interests. We prefer HK as a proxy on China. FULL REPORT