5 Market Insights Going Into Second Half 2016

By July 10, 2016Bitcoin Business
Click here to view original web page at www.forbes.com
Traders work on the floor of the New York Stock Exchange. Markets are still concerned over the U.K. referendum turnout and its impact on the European Union. (Photo by Spencer Platt/Getty Images)

Brexit. China. Central banks. Here’s a quick look at what some top fund managers and analysts from Loomis Sayles’ think investors should be paying attention to in the second half of 2016.

Brexit Impact on Europe

Brexit uncertainty is expected to hit EU confidence and growth with spillover into Central and Eastern Europe. But the smaller countries in eastern Europe are the most vulnerable says Darcie Sunnerberg, senior sovereign debt analyst for Loomis Sayles.

“The biggest potential hit to trade by far would likely be from any spillover weakness in German and core European growth, which would reduce demand for central and eastern European exports. EU structural funds have been important drivers of growth in the region so any potential EU budget cuts resulting from Brexit would have a negative impact,” she says. This gives investors in favorite debt markets like Poland and Hungary something new to consider in the days ahead.

Eyes on the Emerging Market Consumers

Brazil is bottoming and will turn a corner in terms of sentiment, at least, if and when Dilma Rousseff is impeached by the end of August as expected. Russia is coming out of the doldrums as oil prices stabilize. And China and India consumers are still shopping.

“We continue to search for good opportunities in the emerging markets consumer space,” says Elisabeth Colleran, a fund manager with Loomis Sayles. Robust growth over the last 20 years helped consumers move up the value chain, particularly in China, where changing food preferences and leisure activities have been a favorite for stock pickers.

It’s not all China, though.


Alibaba and other e-commerce players seen gaining market share from bricks-and-mortar long term. Investors will have to pick their spots. BABA trades at 18 times earnings. While Argentina’s Latin America powerhouse Mercado Libre trades at 48 times trailing 12 month earnings. (Photo by Michael Nagle/Bloomberg)

“I’ve seen compelling investment ideas in the traditional consumer space including sectors like food & beverage, and brick and mortar retailing, particularly in Mexico where employment trends and consumer sentiment are positive,” says Colleran. “I’m excited about the rise of e-commerce across most emerging countries.”

Colleran doesn’t name names, but beneficiaries in the e-commerce world include MercadoLibre MELI +2.34%, the Argentina-based firm, and China’s beasts Alibaba and JD.com , let alone Amazon.

The U.S. Oil & Gas Shakeout

Oil prices are stabilizing, but nobody knows for how long. Low oil prices have clobbered U.S. energy companies, forcing some into bankruptcy. So far, U.S. lenders have survived the shakeout.

The pace of deterioration in oil and gas loans accelerated during the first quarter just as regulators were completing a review of their status. Elizabeth Schroeder, a credit analyst with Loomis, says losses “appear manageable” given the relatively low exposure the banks have to the oil and gas sector on balance. “We are watching closely for the possibility of contagion to retail loans in oil-dependent regions like Texas,” she says. “Fortunately, despite the deterioration in oil and gas loans, overall loan quality remains strong.”

NIRP & the Beginning of the End for Cash?

Buy bitcoin! The digital currency is up 47.25% year-to-date.


Julian Wellesley, a senior analyst for global equity at Loomis, prefers actual cash. If you can get your hands on it and don’t have to pay to hold it in a money market fund.

Negative interest rate policies, or NIRP, already exist in Japan and most of Europe. “They may visit us in the U.S. next time we experience a recession,” says Wellesley.

(Photo by PETER PARKS/AFP/Getty Images)

Recently, the Federal Reserve asked large U.S. banks to prepare for interest rates that are below zero. In the future, Americans may have to pay interest on their checking and savings accounts. And of course the fees won’t go away…

In May, the European Central Bank announced that it will phase out €500 bank notes. A Harvard study found that criminals refer to the €500 note as a “Bin Laden,” popular for use in money laundering, drug trafficking and financing terrorism. “By phasing it out, the ECB is also making it more difficult for law-abiding people to avoid negative interest rates by storing their cash under the mattress,” says Wellesley about Europeans. “Discontinuing the €500 note may even be the first step towards phasing out physical cash altogether to keep people from hoarding it. These are strange times.”

Is Wellesley a fan of Alex Jones of Info Wars fame? Or he just ahead of his time?

Value In Financials

Some are cheap for a reason. Others are getting overly beat up and are value plays. Which is which depends on investor risk appetite, but for Scott Service, a fund manager for Loomis, Western financials look like the value play heading into the second half.


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“Delevered balance sheets, thanks to stricter regulations, tighter underwriting standards and cost reductions have all enhanced the capital ratios of the banks,” he says. “Stronger balance sheets, an emphasis on less risky, fee-based activities such as wealth management, along with significantly more attractive valuations primarily owing to the disruption caused by Brexit all indicate that this may be a good time to look at some select opportunities in global banks.”

Word to the wide on value hunting in financials, however. The IMF recently warned that Deutsche Bank — not Brexit — was the biggest risk to the European Union.

If it were obvious where to find value, all investors would grab them up on the cheap. There are many factors that influence the performance of stocks, not least being the unprecedented economic climate of negative interest rates and central bank dominance. Even with nearly free money, value stocks have underperformed growth stocks by a small margin.

Since the lows in the S&P 500 on March 6, 2009, the SPDR S&P 500 (SPY) exchange traded fund is up 208.6% as of Friday’s close. The iShares Russell 2000 Value Index (IWN) is up 202%. Over the last five years, SPY is up 58.2% and IWN is up 31% and over the last 12 months it has been completely unhinged. SPY is up 2.6% and IWN is down 2.8%.

“In the short-term it is difficult to envisage value stocks gaining the upper hand. Brexit has sprinkled yet more uncertainty into the global economic mix,” says David Brett, an investment analyst for Schroders in London. “Investing in value will be difficult,” he writes. “Barring a few exceptions, value investors might feel more pain than pleasure in the short-term.”

Find me on Twitter at @BRICBreaker

Brexit Impact on Europe

Brexit uncertainty is expected to hit EU confidence and growth with spillover into Central and Eastern Europe. But the smaller countries in eastern Europe are the most vulnerable says Darcie Sunnerberg, senior sovereign debt analyst for Loomis Sayles.

“The biggest potential hit to trade by far would likely be from any spillover weakness in German and core European growth, which would reduce demand for central and eastern European exports. EU structural funds have been important drivers of growth in the region so any potential EU budget cuts resulting from Brexit would have a negative impact,” she says. This gives investors in favorite debt markets like Poland and Hungary something new to consider in the days ahead.

Eyes on the Emerging Market Consumers

Brazil is bottoming and will turn a corner in terms of sentiment, at least, if and when Dilma Rousseff is impeached by the end of August as expected. Russia is coming out of the doldrums as oil prices stabilize. And China and India consumers are still shopping.

“We continue to search for good opportunities in the emerging markets consumer space,” says Elisabeth Colleran, a fund manager with Loomis Sayles. Robust growth over the last 20 years helped consumers move up the value chain, particularly in China, where changing food preferences and leisure activities have been a favorite for stock pickers.

It’s not all China, though. Alibaba and other e-commerce players seen […]

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