Short US assets now... and go long China: Analyst


Tightening financial conditions in the U.S. will lead to an acute bout of asset price deflation in the U.S. next year, according to Stuart Oakley, the managing director of global emerging markets at Nomura.

"I think you should be short U.S. assets and by that I mean all assets: Equities, credit, bonds" he told CNBC Monday, implying traders should take bets that asset prices will deteriorate in the U.S. in 2016.

He added that investors should be "long" on North Asian equities, adding that he expected Chinese assets to "outperform everything in the emerging market universe over the next few years."

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The end of the Federal Reserve's massive bond-buying programs and the anticipation of higher interest rates in the U.S. are the basis for his call, he said.

The Federal Reserve has embarked on three different quantitative easing (QE) programs since the global financial crisis of 2008, thus making it cheaper to buy and lend dollars.

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However, Oakley has noticed a glaring divergence that this program has caused between the real economy and asset prices.

"The economy, since QE, in the U.S has gone from $14 trillion to $17 trillion, the real economy is growing by about 23 percent. The market capitalization of its stock market has gone up by about 118 percent," he said.

"As monetary conditions tighten, that's got to come back in and that fall in asset prices in the U.S., which is absolutely inevitable, that's going to be the thing that really causes shock waves throughout the world and emerging markets."

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Patrick Armstrong, the chief investment officer of Plurimi Investment Managers, agreed saying that his firm was currently "shorting" several U.S. indexes. He added that the was "still overvalued" over the long term.

"Probably two-thirds of the equity rally we've seen (in the U.S.) is from multiple expansion, people paying more for the earnings rather than the earnings going up themselves," he told CNBC Monday.

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The S&P 500 has enjoyed a six-year bull run in equities and is currently trading at 1,958.03 points. This is a 118 percent gain from the start of 2009 but the benchmark is now down 4.9 percent so far this year with the Fed edging closer to hiking its main benchmark interest rate.

However, there are some analysts that still expect the index to push higher and highlight the fact that the Fed would still be willing to intervene if equities do enter a bad patch.

RBC Capital Markets on Monday also hinted that the benchmark index could be bottoming out after some recent volatility.

Beyond the anticipated short-term volatility, intermediate-term momentum and sentiment indicators were looking "suitably oversold," the bank said in a note, adding that it gave evidence of a seasonal equity rebound during the fourth quarter.

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