Here are sector strategies, global equities risk in Q4

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Here are sector strategies, global equities risk in Q4
Latin American shares, like those in Brazil's Bovespa, continue to offer upside.

Dubai - Biotech has been the best-performing niche in healthcare in 2017

By Matein Khalid

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Published: Sun 1 Oct 2017, 7:55 PM

Last updated: Sun 1 Oct 2017, 9:56 PM

The monetary equations in world finance have changed in the past two weeks. US Treasury bond yields have spiked higher - as have yields in German Bunds and UK gilts. The Yellen Fed has decided to shrink its $4.5 trillion balance sheet and hinted at a December rate hike. Trump has unveiled his tax reform plan while Merkel struggles to craft a Jamaica coalition in Berlin. This means volatility and risk premia in financial assets will rise in October.
High valuations, geopolitical tensions, a bond market bloodbath, insanely tight credit spreads, an emerging market bubble and the return of wage inflation mean the odds of a stock market hit have increased. With the Volatility Index (VIX) below 10, it is obvious that Wall Street and the world is short volatility at a time when rising bond yields, inflation and risk premia argue the opposite. This is the time to buy the volatility futures exchange traded note as risk insurance. The other investment ideas in this column are only applicable once the VIX rises 16 and markets correct.
The politics of the German election, Trump's tax plan, a rise in economic growth, retail sales and inflation all mean steeper yield curves in Europe and the UK. The Euro Stoxx Bank Index trades at 11.8 times forward earnings even as profits and loan growth are set to rise. It will not surprise me to see European bank profit growth of at least 15-17 per cent in 2018. Best bets? BNP Paribas, SocGen in Paris, the UK High Street clearers, ABN Amro and ING in Holland.
Biotech has been the best-performing niche in healthcare in 2017, with the iShares Nasdaq Biotech index up 40 per cent year-to-date. The rally in large cap biotechs was due to the Trump White House's lowered political focus on drug prices, optimism for tax reform, rerating of bellwether firms such as Amgen and Biogen, positive second-quarter earnings and "deal mania" prospects after the Gilead transactions as well as hopes for faster FDA approvals for bellwether drugs. I expect biotech to continue to outperform the health care sector as autumn has seasonal bullish momentum, thanks to takeover bids for small cap sectors and data from medical conferences.
My mulish call on Brazilian equities and a 72,000 target on the Bovespa has come to pass. However, I still believe Latin American shares continue to offer upside as the first synchronised global economic expansion continues to move the prices of base metals, meat, soyabeans and other soft commodities higher. This spells Argentina, now under the role of pro-reform President Mauricio Macri, who has replaced decades of Peronist misrule. Argentina has emerged from recession in 2017 though still burdened by a 35 per cent inflation rate. However, Macri settled with the Paris Club holdouts and led Argentina's fabulously successful return to the international capital markets. Argentina is a frontier market and thus far riskier than more mature emerging markets. The Global X MSCI Argentina fund, is a play on Argentina's financial resurrection under President Macri.
Japanese equities are the most undervalued stock market in the developed world. The Japanese stock market trades at 1.3 times book value, 14 times earnings and a 2.1 per cent dividend yield. Japan can also deliver earnings growth of at least 15 per cent in 2018. The Bank of Japan, unlike the Federal Reserve, the ECB or the Bank of England, has no plans for a balance sheet "taper" or interest rate hike. Tax reform and higher US Treasury yields will cause the Japanese yen to depreciate against the US dollar, though geopolitical tension created by North Korean missile launches or threats can result in periodic spasms of risk aversion. Japan has now emerged from its two "lost decades" of deflation and can well deliver two per cent GDP growth next year. The Japanese stock market is a value investor's dream though only with a currency hedge, provided by a product such as the Wisdom Tree Japan Hedged Equity Fund.
I expect some macro storm clouds ahead. US dollar has index now hit bottom after a eight per cent correction. The spike in US Treasury bond yields, German political risk and the Yellen Fed's balance sheet unwinding means a stronger dollar. A potential Turkish military intervention in Iraqi Kurdistan will ignite an immediate safe-haven bid in the US dollar.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.


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