US shares have hit new highs in recent months as the market has started to price improved growth. Chaar was eager to emphasise that what is happening in the global economy is ‘reflation’, that is a return to historical averages, rather than higher inflation.
He commented that US markets are currently ‘pricing in’ higher growth and reflation, ‘but are correct to do this.’
Chaar believes that the dollar will weaken from current levels, ‘the Trump administration will engineer a weakening. The US government’s current policy is to increase the budget deficit, that is bad for the dollar. Because the dollar has been such a consensus trade, if it starts to fall in value, there will not be any marginal buyers.’
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A marginal buyer of an investment is one who doesn’t typically own it, but instead buys at certain times. Chaar’s view is that the dollar’s popularity has been such that any investors likely to allocated capital to the greenback will already have done so.
He added that at current equity valuations, if the dollar weakens, and with so much positive news already priced in, ‘returns from US equities are likely to be lower than expected by many investors. I don’t think a collapse is coming, but there is better value in other markets.’
He is keen on Eurozone equities, and remarked that, ‘this is a market where improved economic fundamentals are not being priced in. The data shows improvement, it shows reflation and growth, yet the stock market is lower now than it was 18 months ago.’
Chaar continued, ‘The Eurozone economy is OK. It is muddling through, no more than that, but the valuations reflect something else, there is a sort of negative complacency about the Eurozone, a consensus view that the outlook is negative, and that is not reflected in the data.’
The other asset class on which he is keen for the year ahead is emerging markets. Traditional market theory posits the view that a strong dollar and rising US interest rates are bad for emerging market assets.
Chaar doesn’t see a prolonged rise in the dollar from here as likely, and added that the outlook for China is now more relevant to emerging markets than that of the US.
China is a significant consumer of the sort of commodities and consumer goods produced in other emerging markets.
Chaar commented that much of the negativity around the emerging markets has been a function of worries about the outlook for the Chinese economy, but that, ‘China is growing, it is doing well’, and that bodes well for emerging markets.