Roubini: Emerging Markets Ripe; US Equities Stretched

October 07, 2014

Nouriel Roubini is one of the world's most respected macroeconomists. The NYU professor and chairman of Roubini Global Economics made his name by accurately predicting the collapse of the U.S. housing market, but it is his unparalleled insights into countries around the globe that make him a regular at the World Economic Forum in Davos and No. 4 on Foreign Policy's list of the "Top 100 Global Thinkers." Roubini also co-authored "Crisis Economics," which sheds light on the causes of the financial crisis of 2008 and provides a road map for sustainable growth for the future.

Roubini recently sat down with ETF.com to discuss the road ahead for ECB policy and what it means for European equities, as well as what a China slowdown means for the Aussie dollar and other commodity currencies. Roubini wraps up with his outlook and top picks for 2015.

ETF.com: At the latest ECB meeting, they announced the start of the Asset-Backed Security Purchase program, as expected. When we spoke in June, you expected them to go beyond ABS and also buy sovereign bonds. Do you expect any further action from the ECB before the end of the year?
Nouriel Roubini: First of all, what the ECB has done is already quantitative easing. There are multiple definitions of quantitative easing. One is the strict definition that says QE is buying sovereign bonds. But the economic definition is when you increase your balance sheet on the assets side by buying securities.

And whether you buy sovereign assets or private assets, you're increasing the balance sheet, right? So the ECB is already doing QE, even if they don't call it QE and instead call it credit easing.

Then there's a question of when down the line the ECB will run out of ABS to buy, because their current supply of senior ABS and of corporate bonds is too small to be able to ramp up the balance sheet by the factor they need.

So, for the next few months, they're going to buy what they can until they run out. Then they'll have to buy sovereign assets. Could this happen as early as December? It's a possibility. So it's not a matter of whether they're going to buy sovereign bonds, it's only a matter of when. It could be as early as December or it could be sometime next year—I would say, by the spring.

ETF.com: In our previous conversation, you were bullish on European equities. Since that conversation, European equities and growth estimates have taken a hit. Do you see the ECB's latest moves as sufficient to turn things around?
Roubini: Well, there are two forces that are driving European equities. This year, the first half of the year was dominated by disappointments about eurozone growth and inflation. And as we pointed out, the ECB would go first to conventional easing zero policy rates, and then negative positive rates. And once they were running out of conventional tools, they turn to the unconventional.

Both the conventional and unconventional easing should lead to a rally of European equities, but the growth story, so far, has dominated this year. But I would say that, between the weakening of the euro, the substantial easing of financial conditions—with long rates lower, and the spreads for the periphery falling—once these financial measures and portfolio impacts impose the effects of restoring growth, restoring inflation and restoring competitiveness, European equities will start to go higher. And the impact response to the ECB government council meeting in September was initially positive also for European equities.

So I would remain of the view that, if you compare what the ECB is going to do to what Abenomics has done to weaken the yen and rally Japanese equities, well, we expect the weakening of the euro is going to continue as expected through the end of the year. At the beginning of the year, we expected the euro would fall from $1.40 to below $1.30 and now effective yields to fall across the eurozone and spreads to tighten. We have not yet made the call on European equities to start going in the right direction. But I would say it's a matter of time.

ETF.com: Roubini Global Economics recently predicted the Aussie dollar will plunge 20 percent from current levels. Would you share your thoughts here?
Roubini: Well, the view is a combination of a view on China and a view on Australia. The Chinese view is that China, whether you like it or not, is going to slow down in its growth rate: This year, barely 7 percent growth, and next year 6.5 percent growth and, by the end of 2016, growth will be under 6 percent. So the growth rate is going to go down and China will be less resource-oriented as they move away from fixed-investment and resource-oriented growth towards labor-intensive and consumption-oriented growth.

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.

ETF.com: 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.

ETF.com: Thanks for your time.

ETF.com INSIGHT

WisdomTree Bloomberg US Dollar Bullish (USDU | 67)

One of the biggest themes that Roubini identified is continued strength in the US dollar. Specifically, he notes that while many countries are entering or continuing monetary easing cycles, the Federal Reserve stands in stark contrast, as it expects its zero policy rates and withdraws quantitative stimulus. The net effect, Roubini says, is "a gradual overall appreciation of the U.S. dollar on a trade-weighted basis." One way to implement this view is with USDU, which goes long the U.S. dollar relative to a basket of global currencies on a trade- and liquidity-weighted basis. In particular, USDU is long the U.S. dollar relative to the Aussie dollar, the yen and the euro—all of which Roubini sees weakening in 2015.

iShares Core MSCI Emerging Markets ETF (IEMG | B-99)

In the equity space, Roubini sees emerging market equities taking the lead in 2015. In his view, the combination of appropriate valuations coupled with political risk being taken off the table is supportive of a broad rise in emerging market equities. To invest broadly in emerging markets, investors might consider IEMG. For 18 bps, investors get exposure to a basket of more than 1,700 securities from emerging markets around the world. The fund has more than $5 billion in AUM and trades more than $60 million most days. True to Roubini's analysis, IEMG has an aggregate P/E near 14, which is drastically lower than U.S. equities, with an aggregate P/E near 22.

ETF.com Alpha Think Tank ETF Tracker

Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.

We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.

Ticker Fund Name ETF.com Pick Date TR % (Since Pick Date) TR % (1 Yr) Closing Price $ (10/2/14) Inspired By
INDA iShares MSCI India 2/24/14 24.91 32.36 30.12 Roubini
AMU ETRACS Alerian MLP ETN 1/27/14 18.93 22.54 33.09 Luskin
EWW iShares MSCI Mexico Capped 3/3/14 14.44 5.01 67.87 Friedman
GULF WisdomTree Middle East Dividend 3/10/14 12.63 37.90 24.32 Dorsey
INDA iShares MSCI India 4/9/14 11.49 32.36 30.12 Kotok
GXC SPDR S&P China 2/3/14 9.70 1.89 75.29 Rogers
VNM Market Vectors Vietnam 4/15/14 8.13 26.13 22.42 Faber
EWW iShares MSCI Mexico Capped 2/11/14 7.79 5.01 67.87 Fitzsimmons
BAB PowerShares Build America Bond 4/9/14 5.85 14.77 29.75 Kotok
PXH PowerShares FTSE RAFI Emerging Markets 2/17/14 5.81 -1.16 19.87 Arnott
GMF SPDR S&P Emerging Asia Pacific 4/9/14 5.43 9.74 83.02 Kotok
MCHI iShares MSCI China 4/15/14 5.29 1.16 46.37 Faber
DBB PowerShares DB Base Metals 5/8/14 4.77 0.30 16.68 Gartman
USDU WisdomTree Bloomberg US Dollar Bullish 4/15/14 4.56 N/A 25.93 Faber
VTI Vanguard Total Stock Market 4/28/14 4.28 15.34 99.96 Luskin
DBJP Deutsche X-trackers MSCI Japan Hedged Equity ETF 6/12/14 3.84 7.83 37.00 Roubini
NKY Maxis Nikkei 225 2/3/14 3.83 -0.37 17.09 Rogers
RSP Guggenheim S&P 500 Equal Weight 3/10/14 3.14 15.59 74.86 Dorsey
CCXE WisdomTree Commodity Country Equity 3/14/14 3.08 -2.31 28.81 Schiff
XLU Utilities Select SPDR 4/9/14 2.69 16.82 42.27 Kotok
ELD WisdomTree Emerging Markets Local Debt 2/17/14 2.00 -1.83 44.85 Arnott
EWP iShares MSCI Spain Capped 1/27/14 1.89 9.70 37.92 Luskin
MUB iShares National AMT-Free Muni Bond 7/16/14 1.81 8.34 109.67 Kotok
VHT Vanguard Health Care 7/2/14 1.62 24.17 115.65 Yardeni
IEMG iShares Core MSCI Emerging Markets 4/28/14 0.94 1.15 49.37 Luskin
EWJ iShares MSCI Japan 3/3/14 0.86 -2.44 11.36 Friedman
SCPB SPDR Barclays Short Term Corporate Bond 3/17/14 0.47 1.42 30.69 Yardeni
FXC CurrencyShares Canadian Dollar Trust 3/14/14 -0.44 -7.20 89.10 Schiff
VTI Vanguard Total Stock Market 6/10/14 -0.51 15.34 99.96 Friedman
EWH iShares MSCI Hong Kong 4/15/14 -1.18 2.00 20.05 Faber
EWS iShares MSCI Singapore 5/5/14 -1.28 2.15 13.25 Bremmer
FXA CurrencyShares Australian Dollar 3/14/14 -1.52 -4.57 88.01 Schiff
INDA iShares MSCI India 7/23/14 -1.52 32.36 30.12 Bremmer
EWI iShares MSCI Italy Capped 1/27/14 -1.72 4.84 15.10 Luskin
EPOL iShares MSCI Poland Capped 3/3/14 -2.07 -1.02 28.00 Friedman
EWY iShares MSCI South Korea Capped 2/24/14 -2.52 -4.71 58.71 Roubini
BKF iShares MSCI BRIC 5/22/14 -2.78 -1.72 36.53 Arnott
IYY iShares Dow Jones U.S. 9/3/14 -3.02 15.97 97.77 Dorsey
EWP iShares MSCI Spain Capped 2/24/14 -3.50 9.70 37.92 Roubini
ITA iShares U.S. Aerospace & Defense 5/5/14 -4.24 15.38 104.77 Bremmer
IEMG iShares Core MSCI Emerging Markets 6/12/14 -4.42 1.15 49.37 Roubini
ROBO Robo-Stox Global Robotics and Automation 3/3/14 -4.86 N/A 25.65 Friedman
VIS Vanguard Industrials 7/2/14 -4.92 12.01 99.50 Yardeni
EIDO iShares MSCI Indonesia 5/28/14 -4.97 7.19 26.60 Fitzsimmons
EWP iShares MSCI Spain Capped 3/10/14 -5.26 9.70 37.92 Dorsey
INDA iShares MSCI India 9/8/14 -5.51 32.36 30.12 Fitzsimmons
VGK Vanguard FTSE Europe 8/19/14 -5.58 2.41 53.98 Luskin
DBGR Deutsche X-trackers MSCI Germany Hedged Equity ETF 2/24/14 -5.77 5.29 24.28 Roubini
CHIQ Global X China Consumer 3/17/14 -5.90 -12.84 13.40 Yardeni
FXB CurrencyShares British Pound Sterling Trust 7/9/14 -6.02 -0.92 158.63 Merk
FXA CurrencyShares Australian Dollar 7/9/14 -6.12 -4.57 88.01 Merk
AFK Market Vectors Africa 5/5/14 -6.34 5.94 31.02 Bremmer
EPI WisdomTree India Earnings 9/3/14 -6.62 40.00 21.71 Dorsey
EWL iShares MSCI Switzerland Capped 6/24/14 -6.96 4.52 31.97 Dorsey
TAO Guggenheim China Real Estate 8/12/14 -8.08 -4.77 20.19 Faber
FXE CurrencyShares Euro 3/31/14 -8.22 -7.15 124.85 Merk
GDX Market Vectors Gold Miners 3/31/14 -8.41 -10.89 21.62 Merk
KOL Market Vectors Coal 5/8/14 -8.64 -9.75 16.92 Gartman
EIDO iShares MSCI Indonesia 7/23/14 -9.18 7.19 26.60 Bremmer
RSX Market Vectors Russia 2/3/14 -9.50 -21.00 22.09 Rogers
CHIQ Global X China Consumer 2/11/14 -9.52 -12.84 13.40 Fitzsimmons

As of 10/2/14

 

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