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  • Why a medium risk/lower return bull market still lies ahead

    18 Oct 2018
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    As the US Fed withdraws its quantitative easing, two economic drivers are in play that will replace the monetary stimulus: the business-oriented 2017 tax cut and growing productivity, according to a quarterly forecast by Pinebridge Investments.

  • How Equity Markets May Be Misreading the Slowdown in China

    03 Oct 2018
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    Slowing Chinese retail sales have spooked markets, but investors may be misreading what appears to us to be a slowdown in China caused by prudential considerations. Many categories of discretionary spending continue to show solid growth, the property market appears to be in good shape, and imports continue to grow. Long-term value is emerging and China could be poised for a reacceleration in 2019.
  • Despite US Tariffs, China's Deleveraging Will Continue

    23 Sep 2018
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    Look for China’s deleveraging campaign to continue, albeit at a less vigorous pace, despite this year’s slower-than-expected growth and trade headwinds.

    To be sure, the latest round of US tariffs on $200 billion worth of Chinese goods is not welcome. It is the largest and broadest increase yet, and it will be imposed on more consumer-facing products such as electronics, household items, and food than previous tariffs were. This round will start with a 10% rate that may increase to 25% in January. Next could be an additional tariff round on $276 billion of products covering virtually all other Chinese goods imported by the US that have not yet been affected. We estimate that the real GDP drag due to US-imposed tariffs (including the proposed 10% implementation on $200 billion of exports) will be about 40 basis points, with most of the adverse effects being felt next year. If the US implements the 25% tariff rate in 2019, the drag on growth could intensify.

  • Two Reasons to be Selective in India Equities

    13 Sep 2018
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    Over the past several months, we have witnessed two interesting phenomena in India. The first is the considerable shift in India’s micro indicators; the second is the outsize role of a few stocks in driving the stock market. Both of these offer insights on why selectivity is essential in investing in India’s equity market.

    In recent years, India enjoyed good macro conditions primarily led by subdued inflation, lower interest rates and commodity prices (especially for crude oil), a manageable current account, and an appreciating currency. Despite the positive macro backdrop, the micro – or the health of many Indian companies – had room for improvement, with many companies suffering from high leverage and low demand for their products. Challenging micro aside, the equity market (represented by the MSCI India Index) rose nearly 39% in 2017. This surge was largely fueled by domestic as well as foreign flows chasing good macro but ignoring the deteriorating micro environment.

    Fast forward to 2018, and the macro has faced pressure largely from the depreciating currency and higher commodity prices, while the micro environment has improved considerably. Indian companies are moving forward, and demand is coming back.

  • Fixed Income Asset Allocation Insights: Remaining Patient in Emerging Markets

    11 Sep 2018
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    The worsening Turkish currency crisis has led to fears of contagion within emerging markets (EM) debt, widening the EM/US spread differential to historic levels. That is due in part, however, to US investment grade (IG) and high-yield (HY) bonds benefiting from stronger-than-expected earnings, a relatively light new issuance calendar and positive fund flows from retail mutual fund and ETF investors. With our target allocations unchanged, we continue to favor EM debt, which we expect to benefit from attractive valuations, positive trade developments and a moderation in US dollar strengthening. We also continue to find attractively priced IG and HY credits.
  • Investment Strategy Insights: Is The Dollar Destined To Remain Almighty?

    11 Sep 2018
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    It turns out that “America First” has been an apt way of thinking of markets in 2018. US dollar strength is being attributed to emerging markets’ (EM) financing issues, commodity weakness, and seemingly anything else that cannot easily be explained. This leads many to wonder when the dollar’s upward trajectory will have run its course.

    With quantitative easing peaking soon, growth and rate differentials are mattering more. The US came into 2017 as the global growth laggard, yet quickly moved to the front of the pack in 2018 by accelerating while others plateaued. Much of this non-US pause probably rests as much with the powers that be in Beijing as it does with those in Washington.

    Before pulling back late in 2017 and early 2018, China’s policy initiatives pushed for growth in the lead up to the 19th Party Congress. With Europe and EM depending more on trade with China than they do with the US, China’s success or failure in handling its debt, managing its currency, and dealing with tariff issues will have a far greater impact on those nations than it will on the US.

    Europe’s current slow growth, in fact, can be attributed in large measure to China’s careful steps to encourage slow domestic growth, which has cooled demand for goods from Europe and constrained the performance of many European companies that are export dependent.

    Worries about EM dependence on China are partly the reason EM has underperformed developed markets (DM) in all asset classes by about 10% in the past year. Turkey and Argentina’s woes are unique and self-inflicted, yet still fuel fear that the Federal Reserve is on an overly ambitious pursuit of the dot plot, eventually crushing all EM.

  • Select Equity Opportunities for When the Trade Cloud Lifts

    30 Aug 2018
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    This year, equity markets in the US and emerging markets – notably Asia – have decoupled, with the S&P 500 making new record highs while the MSCI Emerging Markets Index dropped sharply. Expected earnings growth, meanwhile, is also rising in the US while falling in Asia.

    The big question is whether the weakening earnings growth outlook in Asia, now the single largest and fastest growing economic bloc, is a temporary issue or a sign of things to come for the global economy. If the main culprit is trade causing business sentiment to turn cautious, that means there is potential for spending to rebound when the trade issues are resolved. But if the main culprit is slowing demand – like what we’re seeing in many of China’s industries, including smartphone, auto, and home appliance – then earnings expectations in 2019 and beyond are too high.
  • The Trade Tension Timeline: Is the Worst Yet to Come?

    28 Aug 2018
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    US tariffs on an additional US$16 billion of Chinese goods just went into effect, completing the $50 billion of tariffs announced in April. The tariffs focus on industrial machinery and avoid many consumer-grade products like computers, smartphones, and apparel. China has reciprocated in kind with tariffs on $16 billion worth of US imports including fuel, autos, and steel products. So what’s next? We see three key events worth watching for the rest of the year:

     

     

  • Investment Strategy Insights: Yield-Curve Inversion in a World of Funhouse Mirrors

    13 Aug 2018
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    In pre-crisis days, market participants understood that central bankers had their hands on the short-term end of the yield curve and knew how to react when rates were dialed down to boost a sluggish economy or up to cool an overheated one.

    In response to the financial crisis, mission creep set in. Leading central banks moved into the long end of the curve, where rates traditionally had been determined solely by market forces. Yesteryear’s yield curve, therefore, was a transparent comparison between the market’s view of the economy down the road versus the Federal Reserve’s. When the 10-year Treasury rate fell below the two-year rate, creating an inverted yield curve, recession typically followed 18 months later – a report card suggesting that the market had superior forecasting powers. Today’s yield curve may have morphed into a kind of financial funhouse, where the rates we see are distorted images of market-determined rates.

  • Midyear Equities Outlook: Focus on Fundamentals

    25 Jul 2018
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    Equity markets continue to normalize. But midway through 2018, this normalization process is more nuanced than it was at the start of the year, exacerbated by the rise in tensions on trade and geopolitics. For investors, this has created an even greater need to focus on company fundamentals over the medium to long term.

    At the equity index level, we believe that valuations are fair, and even attractive in some cases, after the recent de-rating of many stocks. We also consider the current environment for stock selection as being attractive due to the high dispersion in valuation multiples relative to history. 

     

  • The $200 Billion Question: Can China Retaliate Against the Latest US Tariff Threat?

    25 Jul 2018
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    On 10 July 2018, the US announced a list of $200 billion worth of Chinese goods that are subject to a 10% tariff hike. As with the tariffs implemented earlier this month, the White House used Section 301 of the US Trade Act of 1974 as grounds for this latest action. While the $200 billion figure is nothing new – President Donald Trump made several references to this number in recent weeks – the timing gives this move a more aggressive tone. The US is still in the middle of implementing tariffs on the original $50 billion under Section 301. The first round of tariffs on $34 billion came into effect on 6 July, with the second round of $16 billion set to occur within the next few weeks. Further escalation was widely expected to take place after that second round.
    So far, China has matched the US with “dollar-for-dollar” tariffs. This time around, the amount of goods is likely too overwhelming for China to reciprocate in kind. For one, $200 billion exceeds the total value of goods China imported from the US last year (about $150 billion), notwithstanding the tariffs already put in place this year. So, while headlines may include tough talk from Chinese officials, a dollar-for-dollar tariff will be difficult, if not impossible, for them to implement.