Shorter-term Investors should look at taking profits in European equities and switching to China or Brazil, according to Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch Global Research.
Hartnett says that Europe has boomed thanks to low oil, a low Euro, and low rates, and their Fund Manager Survey for March showed a record allocation to Euro-area stock markets. As a result, the German DAX in local currency terms is currently 21% above its 200 day moving average, its most overbought reading since April 2000 (Chart 1).
Given such readings, Hartnett recommends taking profits in European equities and shifting capital to China or Brazil. Like the dollar, volatility, cash and bank stocks, Chinese equities have not prospered during the era of QE (Chart 2). However, Hartnett thinks expectations of EM-easing are growing and Premier Li’s recent comment that China has plenty of ‘policy tools’ to address weaker growth and higher unemployment are sufficient to boost expectations of easing and CNY devaluation.
For contrarians, Hartnett recommends Brazil where the Bovespa looks heavily oversold (Chart 3). In dollar terms the Brazil index is back to its March 2009 lows, a time Hartnett points out when the S&P 500 hit 666, Home Depot was $17.54 and Apple was $11.76.