Rallies like the one that started in 2009 in the US are rare, but we may see something comparable in European equities. Whilst the US Federal Reserve was flooding the financial system with liquidity, the European Central Bank (ECB) was playing with a garden hose. That’s changing. The ECB is offering inexpensive financing to banks, provided those banks lend to the private sector. That should turn banks from dragging on growth to contributing to growth.
What would I avoid? I’m as nervous about emerging markets debt. A stronger dollar is making it harder for businesses and governments to service dollar-denominated debt. Lower oil prices are sending shockwaves through the finances of some countries as they try to fund social programs with less oil revenue. Lower oil prices are great for consumers but not for oil-dependent governments.
Brian Jacobsen is chief portfolio strategist at Wells Fargo Asset Management