Roubini: Emerging Markets Ripe; US Equities Stretched

October 07, 2014

So that implies that demand for commodities is going to fall. And the majority of that fall will be in iron ore, coal and other things that China imports a lot, including from Australia. That demand is already slowing down. It's going to slow down further. And that falling commodity prices, and the quantity of exports of Australia to China, is going to hurt the growth in Australia, is going to lead them to have a negative terms-of-trade effect that will weaken the economy.

Then they will try to ease monetary policy to try to boost growth. And that monetary easing, plus the terms-of-trade effect, plus inflation of housing in Australia is going to lead to a weakening of the Aussie dollar.

And technically speaking, we are expecting the Aussie dollar to fall towards the yen next year to 75. That's less than 20 percent of current levels. It's more like 15 percent. So the call is on the level, which is more like a 15 percent fall of the Aussie dollar. We're now only three months from the end of the year. Looking forward into 2015, which markets do you find attractive? And do you see any surprises coming our way next year?
Roubini: Well, I'd say in the equity space, I think that next year there will be some outperformance of emerging markets relative to developed markets. As you know, valuations were a bit depressed in emerging markets.

If some of the political uncertainty regarding elections goes away and you have more reformist government coming to power in countries from Indonesia to India to other emerging markets, then economic growth in the end could improve, and policymaking could improve as they start to pursue some of the right macro and structural policies. So that might lead to outperformance of emerging market equities relative to developed-market equities.

Within the developed markets, we think that U.S. equities can go up only another 5 percent next year, because valuations are a bit stretched: P/E ratios are above historical averages, meaningfully, if you take a look at the Shiller CAPE measures;, they are particularly frothy in some sectors that have already been identified as bubbly such as social media, tech and biotech.

So I would say, maybe Japan and Europe next year can somehow slightly outperform the United States. So, in the equity space, I would say its emerging markets first, Japan and Europe second, U.S. may come third, as we have stretched valuations coupled with the Fed exiting zero-policy rates.

In currency, we see the strengthening of the dollar continuing. That was the story for 2014. We said at the beginning of the year the dollar is going to strengthen relative to the euro, relative to the yen less so, and relative to commodity currencies [Aussie dollar, Canadian dollar], which are going to be hurt by terms with China. Even the Chinese are not going to let the currency appreciate much more because of its lower growth.

Some of the emerging markets that are fragile tightened up, but now they're loosening up monetary policy. And we've had some downward pressure on some emerging market currencies. Not just the fragile ones, even some of those countries that are not fragile have very low interest rates, like Singapore or Chile or Peru. Some of these are also affected by falling commodity prices from the slowdown in China.

So another theme will be a gradual overall appreciation of the U.S. dollar on a trade-weighted basis. Thanks for your time.

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