Commodities, Emerging Markets Best Plays for Cautious Market

Don’t bet on a stock surge heading into the end of the year. And don’t expect the Federal Reserve to hike rates anytime soon either, said Jose Rasco, chief investment strategist at HSBC Private Bank Americas . “Volatility, slow growth and policy divergence in central banks has us cautious heading into year-end,” said Rasco. “That said, we still prefer U.S. equities, although we expect more volatility.” In Rasco’s view, the Federal Reserve will hike rates slowly, and any rate increases are driven by a longer term desire for normalization rather than fight still subdued current inflation pressures. “While the timing of the next rate hike is uncertain, we believe it will be delayed until 2017, as a result of global uncertainties and mixed local U.S. data,” said Rasco, adding that even when rates do rise the Fed will maintain a policy of “lower for longer.” In this environment, Rasco advises investors to remain defensive on equities and positive on income producing assets. He said his advisory model portfolio remains largely unchanged, with a somewhat defensive tilt, including a small overweight in cash and gold, and a small underweight in equities. “We like large cap dividend-paying stocks in the U.S. and in fixed income we are selectively looking at emerging markets credits as a way to grab some yield,” said Rasco, who sees emerging market economies picking up steam in coming months. Rasco has a positive view on a number of EM stock markets like India, Indonesia and Russia. As for bond markets, he is bullish on India, Indonesia, Russia, Brazil and Mexico. And finally when it comes to EM currencies, he is constructive on Thailand, Indonesia and Mexico. Rasco also said a slipping U.S. dollar will help commodities perform well, especially crude oil which he sees moving strongly higher over the next two years. “The worst is over for the U.S. energy players,” according to Rasco.

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