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SGPB Hambros's Verleyen: 5 ways to profit from the key risks in 2014
by Elsa Buchanan on Dec 09, 2013 at 14:23
The private bank's chief investment officer Eric Verleyen highlights the key risks facing investors in 2014 and explains how he is looking to profit from them.
Whilst investment managers have benefitted from powerful pushes in the markets this year, Societe Generale Private Banking Hambros’ chief investment officer, Eric Verleyen points to five elements that could reverse equity harvesting next year.
Verleyen has revised upwards his US GDP growth forecast to 3% in 2014, above the consensus 2.6% figure.‘The party is not over,’ he says.
He expects cash rich US companies to hike capital expenditure investment in 2014, after focusing on buybacks and dividend pay-outs in 2013.‘Price-earnings ratios are not high, and margins will continue to be high. Good results of companies fully justify the good performance of the stock market.
‘There is no bubble in equities at the current level of 16x P/E in the US.’
RISKS: A bond crash
‘We might discover inflation is higher than we expect: couple that with rising Treasury rates and trouble in the housing market and it could be a problem.’
Capex-related sectors including include industrials, semiconductors and tech hardware. ‘They are well positioned to expand earnings at an above market rate.’
Negative on Treasuries, but favours high yield whith spreads having not yet reached historically low levels.Positive dollar versus euro and sterling.
Verleyen is still positive in 2014, with a 2% GDP growth forecast in 2014, against the consensus’ 1.4%.‘The UK is advancing in the cycle, and the recent funding for lending scheme has been very positive.’
RISKS: A housing bubble
Where? In London, and very locally in overbought areas, he says.
Small to medium caps with local UK exposure and financial stocks such as local insurer Admiral, versus international exposure captured via the FTSE.
Overweight media and telecoms versus cyclicals, and a mix of consumer staples and discretionary, alongside eclectic appliance.
Verleyen has a mixed outlook for Europe and has revised down his GDP forecast to 0.6%, versus the consensus 0.9%.‘Growth has bottomed and the road to recovery is far from being certain, mostly because peripheral countries such as Spain and Italy are still stuck in a contraction phase of deleveraging.’
ECB President Mario Draghi has had a positive influence on core and periphery economies, reducing spreads, he says, adding the Italian has built a ‘friendly economic stable environment’.
RISKS: Spain, ‘still in huge difficulty.’
The fiscal drag, albeit receding, will also remain a nuisance. ‘Investors in continental Europe need to be reassured to invest. This could otherwise drag 1 or even 1.5% off GDP,’ he warned.
Social unrest is also a noteworthy risk.
Neutral. He likes eurozone banks, given the accommodative monetary conditions and the strengthening of balance sheets. ‘Eurozone banks have also lagged US counterparts and we think there could be some catch up.’
The recent rebound in activity is expected to be short-lived, and Mexico could be also impacted by large outflows after QE normalising.However, Verleyen suggests equities could become much cheaper.
On the top of Verleyen's list sit commodity price volatility and domestic structural issues.
He is underweight emerging markets, but recognises some opportunities. ‘We expect dispersion to further increase in the EM universe, and are buyers of emerging markets with current account surpluses and low valuations such as Korea and Taiwan, or Mexico.’
On the flipside he is negative on Brazil in the context of an appreciating US dollar, 5.7% inflation and long term interest rates rise.
In tandem with his negative view on emerging markets, Verleyen has lowered his 2014 GDP forecast to 6.9%, versus the consensus of 7.5%.
RISKS: A credit bubble burst
With China’s debt swelling to $23 trillion, Verleyen questions its sustainability. That said, a banking crisis could be avoided in the long term, he added.
‘We assume The Chinese Communist Party Central Committee will clean up and regulate the banking sector's non-performing loans and its shadow banking.’
Political risk is also expected to be high, says Verleyen, pointing to the growing dispute between Beijing and Tokyo over the East China Sea islands and he points to concerns about internal unrest.
Positive on Chinese equities, which are cheap and he expects to outperform the wider EM universe.