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GLOBAL MARKETS
WEEKLY
6 APRIL 2015
‘Sell in May’ and look for better opportunities
After the strong run in European and Japanese equities
since October last year, valuations are looking stretched in
some markets. What’s more, our analysis shows that the
‘Sell in May’ rubric has a decent track record and, if history
is anything to go by, April could be a good time to trim
equities.
We think it makes sense to reduce overweight positioning
in global equities and focus on areas of better value –
markets or sectors that have lagged in the recent rally and
should have greater upside.
Given the dearth of good investment opportunities at
present, we also think it makes sense to keep some powder
dry while waiting for better and more attractively valued
prospects to appear.
Unloved banks look good to us
In our Investment Outlook 2015: On and off the beaten track, we
highlighted global banks as one such area of value within
equity markets, which has more or less remained unloved
since the global financial crisis.
Banks in the US, Europe and Japan should benefit from
strong consumer spending over the next 2-3 years, given
where they are in the economic cycle. Credit growth is
picking up in all three regions, and falling unemployment
should boost mortgages and lending. And banks look
inexpensive by historical standards, with price-to-book
values (assets minus liabilities) in the 0.8 to 1.2 range.
Still going against the crowd on Russia
Another theme in our 2015 outlook was going against the
crowd on geopolitical risk. While risks haven’t disappeared,
the one causing the most angst heading into 2015 –
systemic crisis and/or economic collapse in Russia – hasn’t
come to fruition. But Russian assets remain very cheap.
The MSCI Russia index is trading at a significant discount
to emerging markets as a whole, and at a lower price
relative to book value than during the 2008 global financial
crisis.
INVESTMENT OFFICE
Key data & events this week
Monday
Wednesday
Thursday
Friday
US ISM non-manufacturing data
Bank of Japan policy meeting
Bank of Eng land policy meeting ; Bank of Japan
monthly report
UK GDP estimates
To find anything cheaper, you would have to go back to the
1998 crisis triggered by the collapse of hedge fund LTCM,
when Russia’s equity market traded at 0.2 times book value
(assets minus liabilities).
This suggests that markets view Russia’s current plight as
worse than in 2008, but not quite as bad as the LTCM
crisis. We think this is an overreaction. During the financial
crisis, when oil prices sank to $35 a barrel, Russia had a
higher ratio of external debt and its banks depended far
more on short-term funding.
Since the Ukraine crisis worsened in February 2014,
Russian equities have fallen sharply, and are well under half
of their recent 2011 highs – in line with some of the worst
geopolitical crises of the past. But our analysis shows that in
90% of geopolitical crises, markets recovered by about a
third on an average three years after the event. We maintain
our positive stance on Russian equities despite the
continuing volatility.
Heading south for better European exposure
German equities have been on a tear recently, gaining 30%
over the past six months, and no longer look like good
value. Spanish and Italian equities have lagged behind and
look far cheaper.
We have long been overweight European equities, and with
the economies of Southern Europe improving, we see this
as a good time to shift some of our European exposure out
of Germany into Spain and Italy, both of which should also
benefit from significant financial exposure (see above for
our positive view on banks).
Arne Hassel
Norman Villamin
Head of Investments
Chief Investment Officer, Europe
Alan Higgins
Mark McFarland
Chief Investment Officer, UK
Global Chief Economist, Asia-based
Terence Moll
Head of Asset Allocation
Charts of the week
Despite global equities still trailing their long-term averages, valuations in
some markets are starting to look stretched
Since the financial crisis, banks have remained an unloved area of global
markets but should benefit from strong consumer spending
Global equities are still below long-term averages
40
Banks have remained unloved since 2007
35
300
30
25
20
15
0
2007
10
M ar-95
M ar-00
M ar-05
M ar-10
2008
2009
2010
2011
2012
2013
2014
2015
M ar-15
M SCI World index
M SCI World price/ earnings rat io
20-year average
Source: Dat astream
M SCI World financials index
Although geopolitical risks have not disappeared Russian equities remain
very cheap and trade at a significant discount to emerging markets
Source: Datast ream, M SCI, rebased t o 100
German stocks have powered ahead over the past six months but we feel
there is better value to be had in other Southern European equities
Russia offers attractive opportunities
German equities no longer good value
1600
1100
1400
1000
1200
900
1000
800
800
600
700
400
600
200
500
0
Nov-14
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Dec-14
Equity Markets
Developed & Emerging Equity Markets
Developed Equity (MSCI)
FTSE All Share
FTSE 100
S&P 500
Nasdaq Composite
DJ EuroStoxx
Nikkei 225
Hang Seng
Emerging Equity (MSCI)
BRIC (MSCI)
Apr -15
Source: Dat astream
105
100
95
27 Dec 14
Developed Equity (M SCI)
Performance (%tr, local)
As of: 1-Apr-15
110
27 Nov 14
Mar -15
Source: Datast ream
Market Performance
27 Oct 14
Feb-15
M SCI Germany index
M SCI Italy index
M SCI Russia index
90
27 Sep 14
Jan-15
27 Jan 15
27 Feb 15
27 M ar 15
Emerging Equity (M SCI)
Current
-1W
-1M
-3M
YTD
14
1,328.8
3,680
6,810
2,060
4,880
379.6
19,035
25,083
50,812
567.3
-0.4
-2.4
-2.5
0.0
0.1
0.8
-3.0
2.3
1.0
2.9
-0.9
-1.1
-1.3
-2.6
-2.5
3.6
1.7
1.2
0.6
1.2
4.8
5.2
4.8
0.6
3.4
19.1
9.8
6.8
5.5
8.3
4.8
5.2
4.8
0.6
3.4
19.1
9.8
6.8
5.5
8.3
10.4
1.2
0.7
13.7
14.8
5.0
9.0
5.5
5.6
5.8
Current
-1W
-1M
-3M
YTD
14
201.2
55.5
1201
237.1
-0.4
2.3
0.3
-1.4
-2.0
-8.6
-0.6
-0.3
-4.2
1.4
1.2
-4.9
-4.2
1.4
1.2
-4.9
-17.0
-50.3
-1.8
-6.9
Source: Datastream
Source: Datastream / MSCI, rebased to 100
10-Year Bond Yields
As of: 1-Apr-15
Change (basis points)
Commodity Markets
Current
-1W
-1M
-3M
YTD
14
1.87
1.57
0.17
0.38
-5
5
-5
5
-22
-25
-18
4
-30
-19
-37
5
-31
-19
-37
5
-83
-128
-140
-41
US Treasuries
UK Gilts
German Bunds
Japanese Govt. Bonds
Source: Datastream
As of: 1-Apr-15
Commodities (TR)
Brent Oil Price (Spot)
Gold Bullion (Spot)
Industrial Metals (TR)
Performance (%)
Source: Datastream
Inflation & Interest Rates
Inflation & Interest Rates
United States
United Kingdom
Eurozone
Japan
Current
Interest Rate Forecasts (%)
Rate Announcement
Inflation (%)
Current
Jun'15 (F)
Sept '15 (F)
Next Date
(Fed Funds)
(Base Rate)
(Repo Rate)
0.0
0.0
-0.1
0.25
0.50
0.05
0.25
0.50
0.05
0.25
0.50
0.05
29-Apr
09-Apr
15-Apr
(Call Rate)
2.2
0.10
0.05
0.05
08-Apr
GLOBAL MARKETS WEEKLY 6 APRIL 2015
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