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Canaccord Genuity positive for US and European equity markets


Performance in 2014 was driven by an overweight to US equities as a result of the company’s thematic investments in Healthcare, Technology and Infrastructure, according to Nigel Cuming, CIO at Canaccord Genuity Wealth Management (CGWM).

He believes the bull case of US equities is still easy to make: it’s the strongest developed market in the world; unemployment is declining rapidly; the halving of the oil price will provide a fantastic boost to consumer spending as will an anticipated pick up in real wage rates as increasing skill shortages should be reflected in higher levels of remuneration in many sectors of the economy. However, a likely call this quarter will be the timing of the reduction in US equity exposure and a switch into markets offering better value.
The divergence in policies between the Fed and the ECB is likely to put further upward pressure on the dollar which will adversely impact US competitiveness and probably US exports as well. The market will need a huge consumer led boom on the back of lower oil prices to enable it to make significant further progress. The collapse in the oil price has provided a “wind fall” profit for central banks as it has allowed them to persist with their zero interest rate policies with continued credibility as inflation rates are so much lower than target. This has led to renewed speculation that the Fed may not make its first move as early as June and may well wait until much later in the year. Nigel Cuming has some sympathy with this view and still sees no compelling reasons for an interest rise in either the US or the UK for the foreseeable future.
If equity markets are dependent on consumers spending their extra disposable income as a result of the oil price rise, a key determinant of sentiment going forward will be the oil price over the coming months. It is perfectly feasible that the present daily oversupply of 1.1 million barrels could disappear very quickly if either OPEC or non OPEC sources cut production or if global demand increases by more than is presently forecast and it should also be remembered that the size of the oversupply is a very small percentage of annual global consumption. However, given the extent of the decline Nigel Cuming feels it is very unlikely that oil will bounce back in the short term especially as much oil production has been hedged at much higher prices and there is no indication that any oil producing country is about to reduce production. CGWM is keeping a close eye on the price and will be looking for another entry point over the next few months.
The ECB’s announcement that it was finally prepared to embark upon large (10% of GDP) and open ended (it will continue until inflation expectations are closer to 2%) Quantitative Easing is to be welcomed. The weaker Euro should lead to more trade and further increase bank lending. CGWM had already increased its European equity exposure to near benchmark late last year which has proven prudent given that this package is clearly beneficial for Europeans. The weakness of the Euro will cause European earnings to accelerate and clearly outpace US earnings so this should continue to be a good year for European equities. CGWM has stated repeatedly over the last few years that governments that preach austerity will eventually be voted out of office (the UK election is getting closer and the pre-election debates are starting now) and therefore the Greek election results did not particularly surprise. Whilst CGWM will be looking for opportunities to increase European equity exposure over the next few months it is unlikely to go aggressively overweight because the ECB’s package will not by itself turn the European economy around. The lack of structural reform and the ongoing difficulties of a monetary union between radically different economies will continue to be growth headwinds.
Cuming concludes that 2015 will be a very volatile year for risk assets and: “We remain positive for equity markets but would not be surprised to see further turbulence over the next month or two.”

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