Short-Lived Rally for EM Views

2018 is on pace to be just the second year post  that all major EM asset classes post a negative return. Nevertheless, emerging markets have rallied over the past month, and two macro narratives have seemed to improve at the margin (trade and Fed policy). We do not expect these accomodative shifts to be long-lasting, but we do see further upside in the near term.We can explain EM’s weak returns through a simple factor model capturing growth deterioration (via our CAI measures), Fed policy (via US 2-year rates), and trade tensions (via the CNY). Importantly, most of the underperformance of EM seems attributable to the weakening of growth. While our base-case forecasts point to EM growth improvement (easier China policy, fading of negative impulses, and early cycle dynamics in some EMs), we acknowledge that macro investors are in “prove it to me” mode vis-a-vis EM growth.

Historically, EM assets have not been able to rally for more than 2 months without growth data improvement. In other words, the narrative of a dovish Fed and de-esclating trade tensions alone could probably drive EM only incrementally higher. In addition to our macro factor model, we assess EM asset moves relative to their historical relationship with core markets (our Wavefronts model). On both these measures, we see only limited upside in a potential further rally for EM equities (+5%), EM local rates (20bp lower), and EM credit (10bp tighter for the largest 19 markets).

Our preferred investment recommendations are relative value in nature. Specifically, we highlight our preference for MSCI EM vs. MSCI EAFE (non-US DM equities) and have raised our target .



Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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信息披露

过往表现并非未来业绩的保证或可靠指标。

本资料载有基金经理现时的意见。有关意见可予更改,毋须另行通知。本数据仅分发作为参考。本文所载的预测、估计及若干资料建基于专有研究,不应诠释为投资意见,或对任何特定证券、策略或投资产品的推荐。文内包含的资料来自被认为可靠的来源,惟并不保证如此。


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