European Markets: Cautiously Optimistic On Stocks, Avoiding Fixed Income
China’s decision to tighten monetary policy on January 12 and weak corporate earnings reports out of the US have put a damper on bullish equity sentiment in Europe. That said, I still think upside momentum can carry further on a tactical basis. Two markets I particularly like are the Russian RTS and Polish WIG20. With oil above US$75.00/bbl, the Russian macroeconomic environment has improved considerably from the crisis period in Q109 and this should mean relative outperformance in 2010 and beyond. That the Russian market still remains well off of its pre-crisis peaks also warrants interest, especially relative to some other major emerging market (EM) equity indices including Turkey’s ISE 100 and Chile’s IGPA which have already made gains near or in excess of their historic highs. (Click on chart below to enlarge)
Russia - RTS Equity Index
Poland has long been one of my favourite macroeconomic stories in emerging Europe and this has been reflected in the very stable and steady uptrend in the Warsaw WIG20 index through 2009. With the economic recovery in Poland likely to pick up pace through 2010, and so long as investor risk appetite can hold, there’s little reason as to why the bull run cannot continue, at least for the time being. (Click on chart below to enlarge)
Poland - WIG20 Equity Index
While equity markets still look healthy for the short term, volatility will remain a key concern, especially as uncertainty regarding monetary policy and the strength of the demand recovery is pronounced. This uncertainty has already been reflected in fixed income markets with treasury yields looking likely to have bottomed already, especially in key European emerging markets. With wide fiscal deficits continuing in 2010 and monetary policy likely to begin to be tightened in H210, there are few fundamental reasons to like treasuries at this stage.