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29 Dec 2015
European equities and EM markets should perform strongly – Goldman Sachs
FXStreet (Delhi) – Research Team at HSBC, suggests that European equities and EM markets should perform strongly due to higher cyclical exposure and the increase in capex pushes commodity prices higher and offers support to the Fed tightening cycle.
Key Quotes
“A long-awaited pick up in US capex should help to support GDP growth, as well as earnings and US equity markets. As corporate investment and expenditure rises, business and consumer confidence should also improve. With the dissipating benefits of QE, a seemingly imminent rate rise, high valuations and the wave of corporate share buybacks, US equity markets are searching for new driving forces. An increase in capex could provide this stimulus and assure markets that companies still have the resources and ambition to invest for the long term.”
“With US capex levels recovering a number of European sectors should benefit. Chief among these is the capital goods sector that would start to expect a wider capex driven thematic. The upside to emerging markets is likely to be smaller, with capex/cash flow levels of over 80% arguably already too high.”
“The decline in commodity prices and ensuing slowdown in expenditure across associated industries has actually been offsetting the increases in capex within other sectors. Nevertheless, lower prices have generally been of benefit to sectors outside of energy, chemicals and mining. These economic benefits should soon be reflected in a significant pickup in expenditure and will subsequently lead to a knock-on effect and further increase in oil, copper, gold and other commodity prices.”
“Higher growth and commodity prices will also offer support to the Fed’s eagerly anticipated tightening cycle, pushing up bond yields. We would thus expect the relative performance of bonds and equities to follow the same pattern that has accompanied other periods when capex expectations have improved, with equities outperforming bonds.”
Key Quotes
“A long-awaited pick up in US capex should help to support GDP growth, as well as earnings and US equity markets. As corporate investment and expenditure rises, business and consumer confidence should also improve. With the dissipating benefits of QE, a seemingly imminent rate rise, high valuations and the wave of corporate share buybacks, US equity markets are searching for new driving forces. An increase in capex could provide this stimulus and assure markets that companies still have the resources and ambition to invest for the long term.”
“With US capex levels recovering a number of European sectors should benefit. Chief among these is the capital goods sector that would start to expect a wider capex driven thematic. The upside to emerging markets is likely to be smaller, with capex/cash flow levels of over 80% arguably already too high.”
“The decline in commodity prices and ensuing slowdown in expenditure across associated industries has actually been offsetting the increases in capex within other sectors. Nevertheless, lower prices have generally been of benefit to sectors outside of energy, chemicals and mining. These economic benefits should soon be reflected in a significant pickup in expenditure and will subsequently lead to a knock-on effect and further increase in oil, copper, gold and other commodity prices.”
“Higher growth and commodity prices will also offer support to the Fed’s eagerly anticipated tightening cycle, pushing up bond yields. We would thus expect the relative performance of bonds and equities to follow the same pattern that has accompanied other periods when capex expectations have improved, with equities outperforming bonds.”