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Equity & Investment Strategy ResearchEquity & Investment Strategy Products: Investment Strategy Weekly, Asset Allocation Quarterly, Politics & Themes, Investment Committee Briefing Pack, Surveys.
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• Recent falls in Equity valuations, even relative to Bonds, were not as great as in December 2018, limiting the scope for a significant bounce
• It is hard to see sustained rallies in Equities vs Bonds, non-US stocks, or Cyclicals vs Defensives until policy rates have been cut aggressively
Emerging Market Equities Still Face Headwinds
Not a Favourable Time for EM Equity Outperformance
Emerging Market equities have underperformed the global benchmark by 10% year-to-date. We remain underweight because the conditions under which EM equities have historically outperformed remain absent. Dollar strength, US equity outperformance, and weak industrial-metal prices are all problematic, as are the growing “Tech War” between US and China and the political crisis in Hong Kong.
The close relationship between the relative performance of MSCI Hong Kong (classified as a Developed Market) and that of EM equities. The sell-off in the former may have hurt the latter (with its 30%+ exposure to China), and is now getting quite extreme. Depending on how the crisis is resolved, there could be an opportunity for investors to revisit EM Equities. But we don’t think we are there yet.
Macro Backdrop & Valuations Remain Unhelpful
ASR’s proprietary NewsFlow indicators for Emerging Markets are as pessimistic as they were six months ago – with negative surprises now feeding through into earnings and revenues. World-trade growth remains negative, with no visibility as to how it returns to positive territory. Moreover, valuations do not offer equity investors much of a buffer against disappointment, being ‘neutral’ on both an absolute and relative basis.
Where’s the Good News?
Interestingly, ASR’s Multi-Asset Survey showed that investors remain surprisingly open-minded about the possibility of EM outperformance, which may be linked to their growing scepticism of further dollar appreciation. Whilst a positive resolution in Hong Kong could provide a short-term fillip for the asset class, history suggests the time to go overweight EM equities is when the dollar peaks & US equities start to underperform.
Each month ASR produces a report which aims to prepare clients for their regular investment committee meetings. The report summarises our asset allocation views, a round of up the global economic and market environment and finishes with topical themes. We call it the Investment Committee Briefing.
The 10 charts for August cover:
• How trade tensions affect the global outlook
• Dovish Fed allowing Emerging Market Central Banks to Ease
• Manufacturing Matters: Services unlikely to Defy Slowdown
• US Dollar Bears have little to feed on
• Gold Benefiting from Increase in Negative Yield Bonds
• 2019 Equity Rally Driven Entirely by Multiple Expansion
• Buyback Flows supported US Multiple Expansion
• US Small Caps not Benefiting from Buyback Recycling
• Boris Johnson’s Strategy Set to Lead to Election
• Infrastructure: Datacentres preferred over Tech
• The sharp decline in Equity prices and Bond yields, as the Fed cut and the trade talks faltered, suggests risk had been priced for perfection
• However, the underlying tenor of both asset-returns and regional and sector equity moves over the last three months has been defensive
• One catalyst for further caution remains the irrational exuberance on corporate profits and EPS growth - and not just in the US market
• Equity markets have rallied on more than the easing of tight liquidity
• Funds continue to hold high cash levels and have not bought the rally
• Strong share buybacks are no longer being offset by de-risking
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