Emerging markets (EM) are stabilizing as commodity deflation has finally run its course. This means the growth outlook for the U.S. and Europe has improved, said Joseph Seydl, U.S. equity strategist at J.P. Morgan Private Bank . “More so for Europe, which is three to four times more exposed to EM from a trade perspective,” said Seydl. Seydl said this has important implications for interest rates. In his view, the ECB’s big easing earlier in the year was an insurance policy against the commodity pain in EM. Now that the pain is over the ECB is now on hold, which is stabilizing global interest rates. “This means Europe can begin to perform better from a growth perspective, and it also means US equities can start to perform more normally,” said Seydl. Or in other words, Seydl sees sectors that have solid earnings growth like technology and healthcare starting to outperform bond-proxy sectors like utilities and REITs. Seydl also does not see the U.S. presidential election turning back the clock on globalization and breaking up the banks, despite the heated rhetoric from both sides. Inertia, in his view, is a powerful force in politics. “The lessons of recent history suggest institutions are difficult to change radically,” said Seydl. “Syriza in Greece failed in its campaign against the E.U. and austerity, the Scottish referendum failed as we got close to the deadline, and Brexit has had minimal impact on markets. We expect the U.S. elections to similarly be more theatre rather than a threat to investment returns.” Are U.S. equities in a bubble because of low interest rates? Seydl said it’s true if rates were to suddenly spike then equities would need to be revalued lower. But he does not see this happening anytime soon. “We are not on the verge of another ‘tantrum’ in the bond market like the 2013 taper tantrum or the 2015 bund tantrum,” said Seydl. “Low inflation and wage growth in the U.S. will keep the Fed extremely gradual, and a still large output gap in Europe means that while the ECB is on hold with its QE program it is in no position to taper anytime soon.”
Subscribe to TheStreetTV on YouTube:
For more content from TheStreet visit:
Check out all our videos:
Follow TheStreet on Twitter:
Like TheStreet on Facebook:
Follow TheStreet on LinkedIn:
Follow TheStreet on Google+:
source
