We have upgraded our view on EM equities to overweight, as EM growth stabilizes amid a pickup in global growth and a lower-for-longer interest rate environment.
Chart of the week
EM exports, corporate earnings and commodity prices, 2001-2016
There may be upside to consensus estimates of global growth, our analysis shows. Accommodative monetary policy worldwide and a brighter economic growth outlook have helped stabilize the U.S. dollar, underpin the rebound in commodity prices, and drive a recovery in EM export growth. EM corporate earnings are now improving, as seen in the chart above.
The “lower-for-longer” rate outlook reduces the risk of a sharply rising U.S. dollar, expands the scope for EM rate cuts (25 so far this year), and makes high-yielding EM assets relatively attractive. Investors have been warming up to emerging markets since February, and their risk appetite appears to be broadening. Even offshore Chinese equities - a performance laggard this year - have started to catch up despite weaker economic data from China in July.
EM equity exchange-traded and mutual funds have attracted $26 billion of inflows since February, reversing a fraction of the roughly $150 billion that had exited the asset class since the 2013 taper tantrum, EPFR Global data show. We see room for further inflows. Asian investors are already rotating into equities, as local bond yields have dropped to new lows under the stampede of a yield-hungry horde. EM equities are trading at a 24% discount to global developed markets on forward earnings multiples. Fundamentals could further improve, we believe, as EM companies focus on controlling expenses and targeting profits over market share gains.
Risks to EM equities include a sudden spike in the U.S. dollar, a renewed weakness in commodities and economic risks in China. Within EM equities we prefer countries showing economic improvements or having clear reform catalysts, including India and ASEAN countries.
|Aug. 22||August Nikkei Japan Flash Manufacturing Purchasing Managers’ Index (PMI)|
|Aug. 23||August eurozone Flash PMI; U.S. Flash Manufacturing PMI|
|Aug. 25||August German Ifo survey|
|Aug. 26||Fed Chair Janet Yellen speaks at the annual Economic Policy Symposium in Jackson Hole|
Fed Chair Yellen’s speech at Jackson Hole may shed light on the central bank’s thinking on the direction of future monetary policy. John Williams, president of the Federal Reserve Bank of San Francisco and a Yellen protégé, published a letter this week calling for a reassessment of monetary policy frameworks. His suggestion for combating the challenges of a low-rate world included higher inflation targets or replacing inflation targets with nominal GDP targets. This could signal a willingness of policymakers to let inflation run hotter. Investors will also look at the PMI data — a gauge of business activity — from a few advanced economies, for confirmation that global economic growth is on a solid footing.
Weekly and 12-month performance of selected assets
|Equities||Week||YTD||12 Months||Div. Yield|
|U.S. Large Caps||0.0%||6.8%||5.0%||2.1%|
|U.S. Small Caps||0.6%||9.9%||4.4%||1.4%|
|U.S. Investment Grade||-0.1%||9.1%||8.6%||2.8%|
|U.S. High Yield||0.5%||14.0%||8.6%||6.3%|
|Emerging Market $ Bonds||0.4%||14.5%||14.5%||4.9%|
|Brent Crude Oil||8.3%||36.5%||7.9%||$50.88|
Source: Bloomberg. As of August 19, 2016. Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Barclays U.S. Corporate Index; U.S. high yield by the Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Barclays Municipal Bond Index; non-U.S. developed bonds by the Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.
Views from a U.S. dollar perspective over a three-month horizon
Insights and Resources