Emerging Markets Outpace Developed: Equities And Commodities Preferred To Fixed Income Says Emirates NBD Wealth Management

Investors should re-balance portfolios in 2013 away from fixed income to take advantage of better returns in other asset classes

Asian, Latin American and Russian equities preferred

Investors should also consider real estate in UAE as affordability and demand appear positive

Investors need to run a balanced portfolio of multiple asset classes and geographies in 2013, according to Emirates NBD Wealth Management, a part of the Middle East’s leading bank. Emerging Market equities and commodities are preferred to US and European fixed income securities.

“Looking at world markets, we see investment opportunities in equities and commodities across the globe; including MENA, where we favour high dividend equities over fixed income,” said Mark McFarland, Chief Investment Strategist, at Emirates NBD Wealth Management, speaking at a recent roundtable: “The Year Ahead: Rising to the Challenge (of Taking Risk).

According to McFarland, US investment spending is recovering while the US financial services and home building sectors are both showing signs of recovery. Although he sees this as positive for the US overall, the consequent increase in demand for supplies to these areas from outside the US - notably from Emerging Markets - should be significant. McFarland went on: “This demand for goods and services should be aided by the continued injection of liquidity, by Central Banking Authorities in the US and Europe, thereby facilitating the flow of capital from Developed to Emerging Markets.”
McFarland is advising investors to hold over-weight positions in Japanese, Asian, Latin American and Russian equities. “Investors should only participate in fixed income if they intend to hold their positions for two to three years. We believe that portfolios should focus on bonds that are investment grade, not junk or high grade as these are either risky or too expensive.”

From a commodity perspective, and in keeping with the need to capture emerging growth or recovery, McFarland favours palladium, agricultural, cyclical and industrial vehicles all of which have a direct correlation with Chinese recovery.

He believes that investors should avoid US and EU bonds where yields have fallen sharply in the last two years. Similarly, European equities are at risk of continued political risk while US equities appear to have priced most of the expected positives into current levels. Unless investors are specifically hedging against underlying risk, McFarland believes that inflation and volatility products offer minimal value for 2013 portfolios.

“Foreign exchange remains interesting to Emirates NBD Wealth Management,” said McFarland. “However, portfolios should focus again on Emerging, rather than Developed, Markets.” He highlighted the Russian Rouble, Mexican Peso, Turkish Lira, Malaysian Ringgit and the Indian Rupee as of interest. “We believe that the yen is likely to fall further and sterling is under-valued. The euro is tricky as it’s politically vulnerable, but very over-sold. The US Dollar will rise in periods of market fear but is a broad sell when growth recovers. The large US deficit will make the US Dollar less attractive than Emerging Markets currencies in general.”

Emirates NBD is also advising investors to look closely at alternative asset classes. “Real estate in the UAE continues to offer good affordability while demand is seen rising, particularly in apartment and commercial sectors,” McFarland commented. He also highlighted fine art. “While not a key component of a balanced 2013 portfolio, this does offer critical low volatility and low correlation to normal asset classes.”

Also participating at the roundtable, Gerhard Schubert, Head of Precious Metals at Emirates NBD Wealth Management, said the precious metals market is expected to show signs of divergence over the course of 2013. “The gold price seems well supported by official institutional buying for portfolio diversification reasons, and the on-going reservations about the state of the US economy and the debt situation. The sovereign debt issues of the Eurozone countries still loom large, and they can be expected to take centre stage again in the weeks and month ahead,” he said, highlighting that the low interest yielding environment in the major countries lent itself further towards investment into precious metals, especially gold.

“Platinum prices have regained the somewhat ‘traditional premium over the gold price, and are expected to stay in a market prone to potential supply shocks out of South Africa,” said Schubert, explaining that Platinum recently experienced a significant change in its fortunes, as a result of the reduction in platinum production, shifting the balance of supply and demand towards a supply deficit for the first time in recent years.

Schubert pointed out that Palladium has the best fundamental story of all precious metals. With a supply deficit already accepted as a given, it is widely assumed that the Russian stockpiles have been sufficiently depleted. “The automotive industry is the biggest customer of the palladium industry, and its outlook is positive, even though European car production is lagging behind. Palladium has already gained 20 per cent in the last eight months and the outlook for a continuation of this trend is expected,” he added.

Concluding the round table, McFarland commented: “The key to 2013 will be the potential for growth in the US which, in turn, will generate faster growth from outside the US, mostly in Emerging Markets. This will generate better market returns in Emerging Markets.”

Emirate:  Dubai

Date: Feb 13, 2013

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