PA ANALYSIS: An EM rebound, calmer commodities, and other reasons to be optimistic

I’ve lost count of the number investors who described themselves as “cautiously optimistic” in 2015, but going into 2016 maybe we should drop the caution entirely (or at least tone it down a bit).

PA ANALYSIS: An EM rebound, calmer commodities, and other reasons to be optimistic
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Stabilising commodity prices

So what of commodities? Average prices are around half their peak level of April 2011, but Moz Afzal, chief investment officer at EFG Asset Management, believes now is the time for prices to stabilise.

“Some see the fall as marking the end of a very long, highly unusual, ‘super cycle’ in commodities, but we see it differently,” he remarks.

“For companies in the commodities sector, consolidation, aggressive cutting of capital expenditure and defaults on the debt issued by high-profile companies in the sector will mark, we think, the lows for commodity equities. However, the recovery will be long and drawn out.”

Certainly, a more stable dollar would support global commodity prices, and may well help emerging markets.

Emerging markets rebound

According to Killik & Co’s research team, many emerging economies have undergone challenging fiscal and monetary rebalancing in recent years. However, having seen significant depreciation in emerging market currencies, the team expects any further gradual rises in US interest rates to be largely absorbed by the markets.

They say: “Better macro fundamentals and a stabilisation of growth is required in order to support a broad-based equity market recovery in the emerging markets. However, valuations have fallen to a level which adds support to the readjustment that has already been made by many emerging market economies.

“The MSCI Emerging Market Index trades on a near 40% discount to the MSCI World Index on a price-to-book basis. On a cyclically adjusted price-to-earnings basis the region trades at levels comparable to those seen during the global financial crisis.”

So far so good for equities, but what about fixed income markets? For many commentators, it seems high yield could also be set for a rebound in fortunes.