Italy cannot be missing from the portfolio now, but exposure to emerging currencies can gradually return. Overall, the market has already discounted the rate hike and is now waiting to understand what will happen in 2016. Mario Spreafico, investment director of Schroders Wealth Management, explains to FIRSTonline what is happening on the markets and how to move in this phase dominated by the waiting for the decisions of the central banks.
After the collapses of the summer, the equity markets tend to alternate positive sessions with negative sessions, often interpreting macroeconomic data differently. What stage are we in?
We are in a substantially wait-and-see phase. Up front are a series of uncertainties: on the one hand, the stability of global growth with a series of alarms linked to emerging markets and the consistency of the US recovery. On the other hand, there are aspects related to deflation in Europe. This mix of uncertainties enables the markets to look to the near future to understand what will happen. However, this is not a short-term expectation but a medium-term one, the markets are looking to 2016.
At the beginning of 2015, the president of the ECB Mario Draghi launched the European Qe, deflation is still a theme for the markets today
It's still a theme because a year ago there wasn't the aspect of the sharp drop in raw materials, the sharp debacle of oil. In Europe, deflation was on the demand side, but no account was taken of the sharp drop in raw materials, which now poses a problem of delation on the supply side as well. If the drop in raw materials is positive for the reduction in production costs, it puts an aggravation on the inflation front. This is why the market discussion on an extension of Draghi's Qe is strong these days. This also applies to the US. Even if there is a recovery underway and if there are no deflationary risks, the probable delay in the rate hike is due to external concerns.
What do you expect in terms of central bank decisions and oil dynamics?
We expect the Fed to do something about raising rates by the end of the year/beginning of 2016, but it must also take into account what is happening outside the US and the risk of a domino effect in emerging countries. The ECB will stand still for a while. We see oil stabilizing around 50 dollars a barrel.
Should we expect further strong shocks on the markets in the coming months?
Overall, the market has already discounted the rate hike and also the domino effect triggered in emerging countries. And even on the American price lists I don't see any major changes or corrections. The decline in oil has weighed on energy by rebalancing valuations and now US quarterly and company guidance are broadly in line with forecasts.
Are emerging markets a real concern?
Over the past decade, the contribution of emerging markets to global growth has been overestimated. This led to a huge influx of foreign capital, to the paradox that the virtuous countries were no longer the developed countries but the emerging ones. With some of these having even better sovereign debt ratings than Italy or Spain. In recent months, the perception has been reversed and there has been a huge outflow which first of all affected the stability of currencies with a real massacre, with losses even around 50%. But just as people exaggerated five years ago in believing they were the solution to global growth, now they are exaggerating their reaction. I am an aspect but I am not the problem. China is still a matter of waiting, but despite this reorganization the government has all the resources necessary to promote growth, it has not spent all the cartridges.
How are you moving?
After this currency devaluation they could be interesting, we are reducing the underweight on emerging currencies and we are buying again. But the focus today is on European equities. Northern Europe has grown economically in recent years like the USA and some order is being created. Europe is further behind in the economic cycle, there is more room to see growth. These are the markets that have suffered the most in the past, even unjustly.
Is it time for action yet?
Those who want to have attractive returns have no alternative to shares. Bonds still live with excessively low interest rates (and expectations of still low rates for a long time). We are underweight government bonds because we believe that yields are very low indeed, there is little to bet. However, the US credit market, both state and corporate, has already discounted the rate hike and we are starting to see a change in the perception of risk. The divergence of US high-yield corporate bonds with respect to government bonds and the corporate investment grade world has increased. So we are looking at opportunities on US high yield bonds, clearly hedged against currency risk as we expect further dollar weakening.
What can't you do without in your wallet today?
One cannot do without Italy, on which there is also a great focus at an international level. The placement of Poste is an important testing ground for the Italian system as well. We are also interested, it has good numbers and a good history of restructuring. Furthermore, if it is true that Italy is considered peripheral for the shares it is not for the debt market. Although the spread on the bund has narrowed, there is still room and this also benefits the shares.
