Rising oil prices and the euro debt crisis won’t smother brighter economic prospects, with equities and commodities set to rise

While equity markets may consolidate following the powerful rally since the beginning of the year, Bank Sarasin does not expect the euro debt crisis or rising oil prices to throttle stock markets’ brighter prospects.  In the March edition of its Global Snapshot Monthly, Bank Sarasin predicts that better economic conditions will fuel investors’ risk appetites, supporting the continuing shift from low-risk investments to riskier assets.  The outlook for equities and commodities, including gold, is particularly good.

While the euro debt crisis seems to have subdued, investors are now unsettled by rising oil prices, driven by events in Iran. The recent 15% increase in Brent crude oil prices is much smaller than the 60% experienced during upheavals in Egypt and Libya and should not be a problem as long as price rises do not impact global economic growth.  Because the demand for oil is not particularly strong given that Europe and the emerging markets are at the very beginning of a recovery, price increases reflect a geopolitical risk premium. Bank Sarasin expects prices to fall again if a military escalation in the Middle East is avoided, although the development of oil prices is being monitored closely.    

Philipp Baertschi, Chief Strategist, Bank Sarasin & Co: "Oil prices aren’t going to spoil the party.  While there may be a consolidation given overly optimistic sentiment, cyclical upswings and economic recovery offer brighter prospects and will fuel investor appetite.  We expect investors, many of whom have been on the sidelines for some time, to return to the market, further supporting equity market rallies."

Since the cyclical upswing in the US and the rest of the world appears more robust than last year, positive macro surprises should lift stock markets further.  Brighter earning prospects and valuations support a continuing rally, with Bank Sarasin forecasting another 10% rise before markets reach fair valuation. Although sentiment is too optimistic, which may lead to a consolidation, major setbacks appear unlikely because many investors, who want to increase their equity allocations, have yet to do so.