HSBC’s research has highlighted that the dollar weakened immediately after the first rate rise of the Fed’s last four hiking cycles. This suggests monetary policy divergences may already be priced into the dollar, and we believe the currency will offer an attractive contrarian short opportunity in the second half of 2015.
Any weakness in the dollar would be likely to have a positive impact on both commodity prices and emerging market equities, at least in the short term.
These assets have both suffered from the currency strength and should enjoy a powerful relief rally given the extremity of negative sentiment towards them.
The bias towards commodity producers within the market cap of the MSCI Emerging Markets index would be supportive and we would highlight Brazil as a particularly interesting contrarian trade, given the extent of negativity towards the country’s equity market.
Moreover, emerging market equities are well positioned for any environment of reflationary asset pricing, underpinned by improving global economic growth, the higher oil price and receding concerns about deflation.
Valuations are undemanding relative to history, unlike in many developed markets, and this may prove compelling at a time when US equities seem expensive on a range of value metrics.
China’s impact
China’s slowdown has acted as a drag on emerging market equity markets even though the Chinese A-share market has enjoyed exceptional strength. However, the significant policy loosening over the course of 2015 is starting to have an effect.
More evidence of a growth inflection in China would certainly contribute to a sea change in sentiment towards the emerging markets complex and add impetus to any upcoming rebound in stocks with sensitivity to global economic growth.
We have highlighted two contrarian opportunities that may be rewarding in the second half of 2015.
However, we do anticipate challenging and volatile market conditions in the run-up to the Fed’s interest rate decisions in September and December. The discerning contrarian will need to assess carefully the longevity of these trades and uncover new opportunities as the cycle unfolds.
The apparent seasonality of US GDP growth, with regularly weak readings in Q1, may offer the next such opening, especially if the Federal Reserve has raised interest rates in the final months of 2015 and triggered a rush to sell fixed income instruments.
