Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Economic democracy wikipedia , lookup
Business cycle wikipedia , lookup
Economic growth wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Nouriel Roubini wikipedia , lookup
Chinese economic reform wikipedia , lookup
Rostow's stages of growth wikipedia , lookup
Glovista Global Emerging Market Perspectives Monthly Newsletter for Emerging Market Investors Issue 50 February/14 This issue : Emg Mkt. Sector Performance P.2 S&P 500 Sector Performance P.3 Ccv and Cmdty Performance P.4 Dr. Carlos Asi lis Tel: (305) 333 0012 GeopoliticalDevelopmentsand [email protected] Darshan Bha tt, CFA Tel: (212) 336 1542 [email protected] CyclicalDynamicsReinforceOurEM CountryandSectorTilts Country‐wise Performance (Gross) ‐ (US$) January 2014 0.2% Taiwan Over the past several weeks, economic releases out of the world’s largest economic blocs have underwhelmed consensus estimates, particularly in the USA and Japan. As discussed at some length in our accompanying Glovista Global Perspectives column, multiple factors, of a transitory nature, may be at play, including (1) an unusually adverse winter in the US Northeast and parts of Asia, (2) the timing of this year’s China’s Lunar Year and (3) inventory correction dynamics in the USA and Europe. Notwithstanding the possible role of transitory factors in the softness of recent economic releases out of the developed world, asset markets have responded to such underwhelming statistics by discounting a higher probability of a more durable economic slowdown in the months ahead. For example, equity prices of cyclical sector indices within the global equities space, Antipodean currencies’ US Dollar exchange rate crosses, and Enri que Figuer oa, CFA, CFP government yield curves’ steepness have reacted in such manner over the course of 2014. India ‐3.8% ‐5.5% South Korea ‐5.6% Malaysia ‐5.8% Poland ‐6.5% MSCI Emg Mkts ‐6.5% Mexico ‐6.7% China ‐10.1% South Africa ‐10.1% Russia ‐10.6% Brazil Tel: (650) 378 1246 [email protected] As the economic calendar in the developed world has weakened these past several weeks, emerging market asset prices, particularly those country and sector indices most susceptible to cyclical swings in the global economic calendar, have underperformed developed market peers (e.g. Brazil) while others (e.g. India, Poland, Taiwan) have sustained relative outperformance of several developed market peers on account of both global and country specific factors. In the balance, the mosaic of outperforming sector and country tilts within EM accords closely to the set of sector and country tilts that have been Source: MSCI & Bloomberg Glovista Investments ‐ 1 ‐ kept at overweight exposure in Glovista’s managed emerging market equity portfolios. From a macro perspective, the growing return performance dispersion across emerging market country and sector indices is rather encouraging for the outlook of emerging market equities’ relative performance versus developed peers. First, a growing number of emerging market central banks are finding greater flexibility to discontinue the succession of interest rate hikes prevalent throughout much of last year, and even begin to cut policy interest rates as inflationary pressures abate. In turn, the deceleration of inflation dynamics for a selection of emerging market countries is the result of a significant improvement in current account balances (e.g. India, Poland, Chile, among others) that have helped bring about much needed exchange rate stability. A second macro dynamic that is proving rather supportive for a selection of emerging market countries (most notably, Taiwan, our largest overweight market) is derived from the strengthening of demand conditions for information technology products and services globally. Consequently, emerging market information technology stocks are undergoing a much stronger revenue and earnings growth acceleration than most other sectors. Sector Wise Performance (Gross) ‐ January 2014 ‐1.6% ‐4.2% ‐4.8% ‐5.9% IT HC UT ‐6.2% IN ‐6.5% Emg Mkts ‐6.6% MT ‐7.8% TS ‐7.9% FI ‐8.6% CS ‐9.4% A third macro dynamic that is becoming increasingly important for the outlook is that of China’s economic transformation away from export-led to domestic consumption-focused growth. Consequently, our longstanding bearish outlook towards the industrial metals space is reinforced by Chinese economic releases and Chinese policy decisions confirming the Chinese leadership’s willingness to withstand lower growth rates for the country’s GDP as a cost to pay for laying the foundations for sustainable long-term economic growth. CD Finally, from a policy perspective, the recent politico-economic crises in Ukraine, Argentine and Venezuela serve as a reminder of emerging market countries’ heterogeneity so that while some countries (such as China and Mexico) are well under way in the adoption of deep-rooted economic reforms highly constructive to those countries’ medium- and long-term outlooks, other countries (Argentina, Venezuela, Ukraine and a handful of others) have fallen prey to the toxic forces of populism and government intervention in daily economic activity. EN ‐12% ‐9% ‐6% ‐3% 0% Source: MSCI “…a growing number of emerging market central banks are finding greater flexibility to discontinue the succession of interest rate hikes prevalent throughout much of last year, and even begin to cut policy interest rates as inflationary pressures abate.” GlovistaGlobalPerspectives Weather, Economic Calendar and Heightened Central Bank Policy Uncertainty Cloud Intermediate‐term Equities’ Outlook; Glovista SustainsDefensivePortfolioStance Thus far in February, global equities have partially retraced the sharp price declines recorded in January. Of greater interest to the Glovista investment team, the anatomy of the recent stock price rebound stands out on multiple levels. Most notably, the recent rebound in equity prices presents a very different sector leadership than what obtained throughout much of the second half of 2013. Specifically, as illustrated in Figure G-1 and Figure G-2, defensive sectors have led cyclical sectors, not only in the US equity market context (Figure G1) but also at the global level, as evidenced by Japanese equities’ year-to-date return underperformance versus both developed and emerging market peers (Figure G-2). The Glovista investment team finds of interest that corresponding year-to-date market dynamics in other asset classes, most notably commodities, have confirmed the defensive tilt present in equity market internals. For example, thus far in 2014 precious metals prices, including gold and silver, have recorded technically meaningful rebounds, with the gold price breaking above its 200 day moving average for the first time since February 2013 (Figure G-3). Likewise, developed countries’ government bond yield curves have undergone bull flattening moves, also confirming the macro implications reflected in equity market internals and precious metal prices (Figure G-4). In the balance of this monthly commentary, we lay out the Glovista investment team’s assessments of the macro underpinnings behind global markets’ recent price dynamics together with selected implications on overall portfolio strategy. ‐ 2 ‐ FigureG‐1.USDefensiveSectorsOutpaceCyclicalPeersEarlyin2014 S&P500 Monthly Sector Performance – Jan' 2014 % Change FY1 PE Ratio Energy ‐6.33% 12.5 Materials ‐4.66% 16.0 Industrials ‐4.53% 16.2 Cons Disc ‐5.97% 18.3 Cons Stap ‐5.30% 16.8 Sectors Technology ‐2.59% Source: Bloomberg *YTD Performance Data through February 25th 2014 14.9 Healthcare 0.87% 17.0 Financials ‐3.73% 13.0 Utilities 2.88% 15.5 Telecom ‐4.16% 13.8 S&P500 ‐3.56% 15.2 FigureG‐2.JapaneseEquitiesUnderperformGlobalPeersEarlyin2014 (Chart:MSCIJapaninUS$termsrelativetoMSCIWorld) Source: S&P Source: MSCI, Bloomberg & Glovista Calculations World Economy’s Momentum Surprises Negatively Early in 2014 Owing to Adverse Weather, Inventory Correction and Lagged Effects from Credit TighteninginEM The economic calendar has met the turn of the year with a virtually universal softness, versus consensus estimates, across all of the world’s principal geographic regions, as illustrated by various economic surprise indicators (Figure G-5). ‐ 3 ‐ FigureG‐3.Earlyin2014GoldPriceBreaksAbovetheTechnicallyMeaningful200Day MovingAverageLevelforthefirsttimesinceFebruary2013 January Change Oil 1244.55 19.1775 97.49 3.2% ‐1.5% ‐0.9% EUR JPY GBP CHF CAD AUD BRL MXN 1.3486 102.04 1.6439 0.9065 1.1128 0.8756 2.4128 13.3573 ‐1.9% 3.1% ‐0.7% ‐1.5% ‐4.8% ‐1.8% ‐2.1% ‐2.5% Gold Silver Jan '14 Source: Bloomberg Source: Bloomberg& Glovista Calculations FigureG‐4.USTreasuryYieldCurve(10yr/2yr)BullFlattensEarlyin2014,Possibly SignalingSlowdowninEconomicRecoveryDynamics Source: Bloomberg& Glovista Calculations The weakening of the world economic calendar early in the year likely reflects the sum total of multiple factors, including: Adverse weather: as most readers are already aware, this year’s winter in the northern hemisphere (particularly North America) has been the most severe since 1988 owing to the occurrence of polar vortex weather dynamics. Consequently, sectors of the economy including retail, housing, restaurants, leisure, among others, have been impacted considerably. ‐ 4 ‐ Figure G‐5. Economic Surprise Activity Indicators Weaken across Multiple Regions earlyin2014 (Chart:CitigroupEconomicSurpriseIndex–MajorEconomies) Rates 1 Yr CD 5 Yr CD 30 Yr Jumbo Mortgage 5/1 Jumbo Mortgage US Govt. 10 Year 10 Yr Swap Spread January 31st Level 0.68% 1.33% 4.45% 3.02% 2.64% 0.14% Source: Bloomberg “The Glovista investment team’s assessment that consensus economic growth expectations, particularly for the USA, are likely to prove optimistic underlies the continued defensive stance we have taken in our managed accounts.“ Source: Citgroup Global Markets Inc. Inventory correction: Most purchasing managers’ diffusion indicators for the developed world, particularly in the USA, indicated elevated levels of inventory accumulation late in 2013. Consequently, some of the recent softening in business investment expenditure levels is likely to reflect correction dynamics from such elevated inventory levels prevailing at the end of 2013. Normalization of elevated US capex levels in 2013H2 as fiscal incentives drew to a close: The turn of the year marked the end of several important depreciation allowances in the USA that may have resulted in the front-loading of some 2014 capex to 2013. Consequently, payback effects from such dynamics are likely to be present in the weakening business investment expenditure momentum early in 2014. Lagged effects from credit tightening in emerging markets: As most readers are well aware, the post-May 2013 period has resulted in a considerable tightening of credit conditions across a number of emerging market economies as central banks in those countries have met downward pressure on their countries’ currencies with interest rate hikes (e.g. India, Brazil, Turkey, Indonesia, among several others) so as to forestall additional currency weakness that may result in significant violation of longstanding inflation targets set by those countries’ central banks. Evidently, one of the corollaries emanating from such policy responses includes a weakening of domestic demand and overall economic growth, one of whose manifestations is the reduction of the affected countries’ trade and current account deficits. Selected Macro and Market Implications Stemming from the Weakening EconomicCalendar As we have highlighted in prior monthly commentaries, an acceleration of earnings growth momentum in 2014 has been one of the main tenets anchoring global investors’ bullish outlook for global equities, reflected in developed market equities’ (especially USA) extended valuations relative to historical average levels, and adjusted for prevailing extended profit margins. The Glovista investment team’s assessment that consensus economic growth expectations, particularly for the USA, are likely to prove optimistic underlies the continued defensive stance we have taken in our managed accounts. In assessing the macro and market implications stemming from this year’s weaker than expected economic calendar, we draw several conclusions, including: ‐ 5 ‐ “Inflation in the developed world, as well as in a large cross‐ section of the emerging markets universe (with several exceptions, including Brazil, South Africa, and others) is likely to surprise to the downside in the coming quarters…” Inflation pressures likely to surprise to the downside: Inflation in the developed world, as well as in a large cross-section of the emerging markets universe (with several exceptions, including Brazil, South Africa, and others) is likely to surprise to the downside in the coming quarters as the softening of demand conditions early in 2014 as well as late in 2013 (recent downward revisions to end 2013 data in the USA and Japan, for example) result in a reacceleration of the elevated levels of slack in those economies. Risks to economic growth outlook remain balanced around its below trend level: On the surface, many of our readers may take issue with this assertion on our part as a reacceleration of growth dynamics in the USA especially is quite likely once polar vortex conditions abate and potent payback dynamics take hold in several of the affected sectors of the economy such as retail and housing, for example. Indeed, the Glovista investment team expects such reacceleration dynamics to take hold starting in the second quarter of the year. Nevertheless, we believe that many observers are likely to be underestimating the adverse growth effects on developed countries’ economic outlooks resulting from the longstanding weakening of growth momentum in several of the world’s major emerging market economies, most notably China’s (the world’s second largest economy). If our assessments laid out above are even partially correct, it follows that the European Central Bank’s standing monetary policy stance is likely to prove misguided in that meaningful disinflationary dynamics may take hold in the Eurozone region in the months to come. Ultimately, we believe the European Central Bank will react to such developments by loosening liquidity conditions aggressively. However, the task of handicapping such scenario remains highly challenging owing to the ECB’s political constraints, complex decision-making apparatus and the presence of a modest reacceleration of domestic demand conditions that lessen the urgency of such ECB policy adjustment. At the market level, if our above assessments prove even partially correct, it follows that US equity prices run the risk of losing considerable momentum versus other global equity peers. Specifically, much growth has been discounted in various pockets of the US equity market that may disappoint meaningfully under a scenario of weaker than expected inflation pressure and economic growth. We believe the sectors most at risk include industrials, consumer staples, consumer discretionary, utilities, telecom and large cap financials. We remain attracted to several other US equity sectors including healthcare, software technology and regional banks. Outside global equities, we believe a scenario with weaker than expected inflation and growth momentum may be somewhat supportive to precious metals and selected industrial commodities. In addition, over the past several weeks, we have become constructive towards selected areas within the soft commodities (agriculture) space, most notably Corn. Looking ahead, we believe global investor attention is likely to center around several dynamics, including: the Bank of Japan’s response to the recent softening in economic momentum as the Japanese economy approaches the month of April when tax hikes are scheduled to be implemented, Chinese government authorities’ continued response to the heavy expiration schedule of trust investment structures, an important share of which is likely to prove impaired – the implications on global growth from a disorderly unwinding of such structures could be meaningful. In conclusion, the Glovista investment team maintains a defensive portfolio strategy stance whereby we maintain modest exposure levels to global equities (favoring Eurozone periphery markets, Japan and selected emerging markets and US healthcare and regional banks), overweight allocations to agriculture commodities, neutral allocations to precious metals (both gold and silver, a tactical position) and overweight allocations to credit markets, particularly US Dollar denominated. ‐ 6 ‐ Disclaimers: 1. 2. 3. This newsletter from Glovista is for information purposes only and this document should not be construed as an offer to sell or solicitation to buy, purchase or subscribe to any securities. This document is for general information of Glovista clients. However, Glovista will not treat every recipient as client by virtue of their receiving this report. This newsletter does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The securities discussed in this document may not be suitable for all investors. The price and value of investments referred to in this newsletter and the income arising from them are subject to market risks. Past performance is not a guide for future performance Certain transactions including those involving futures, options, and other derivatives as well as non-investment grade securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and understood the current risk disclosure documents before entering into any derivative transactions. This newsletter has been prepared by Glovista based upon publicly available information and sources, believed to be reliable. Though utmost care has been taken to ensure its accuracy, however, no representation or warranty, express or implied, is made that it is accurate or complete. The opinions expressed in this newsletter are subject to change without notice and Glovista is under no obligation to inform the clients when opinions or information in this report changes. This newsletter or information contained herein does not constitute or purport to constitute investment advice and should not be reproduced, transmitted or published by the recipient. This document is for the use and consumption of the recipient only. This newsletter or any portion thereof may not be printed, sold or circulated or distributed without the written consent of Glovista. Forward-looking statements in this newsletter are not predictions and may be subject to change without notice. Neither Glovista nor any of its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information included in this newsletter. 4. 5. 6. 7. 8. 9. Glovista Investments One Evertrust Plaza, 11th Floor Jersey City, NJ 07302 Tel: (212) 336-1540 www.glovista.net ‐ 7 ‐