October 2018 Investment Monthly
The key takeaways:
- We have downgraded emerging market (EM) equities from overweight to neutral. But we remain overweight on Asia ex- Japan equities and local-currency EM government bonds. We also remain overweight on global equities, and underweight on developed market (DM) government bonds
- Global equity markets edged up in September, with investors broadly shrugging off an escalation in trade tensions between the US and China
- The Fed raised interest rates by 25bp in September, with monetary policy no longer described as “accommodative”
- Eurozone and UK GDP growth are holding up well, both expanding by 0.4% qoq in Q2, but downside risks remain
- In China, policy easing is now focussing on local government infrastructure spending, tax and tariff cuts and initiatives to stimulate consumption
- Japan’s economic activity remains supported by a robust labour market and rising wage growth, whilst investment is being supported by limited spare capacity
- Our latest Nowcast shows a stabilisation in underlying economic activity in EM economies
EM Asian equities appear more attractive than other EM regions
There has been a clear loss of economic growth momentum in EM countries this year. However, the deterioration has not been uniform across the EM space. Consequently, we now prefer to fulfil our EM equity exposure in Asia, where economic growth has been comparatively robust (compared to Latin America for example) and structural characteristics are better. This preference for Asian equities means we retain our overweight stance on Asia ex-Japan equities, but downgrade our overall EM equity view to neutral. We still prefer taking EM risk through local currency government bonds where prospective risk-adjusted returns are higher than EM equities overall. We remain overweight in this segment, but being selective remains important.
Elsewhere, our views are unchanged this month. The current macroeconomic backdrop remains supportive for risk assets and the corporate sector continues to be robust. Based on current valuations, global equities remain the best way to benefit from this environment, in our view. We also remain neutral on corporate bonds, with valuations having improved year-to-date. Finally, we believe DM government bonds continue to offer low sustainable returns, although shorter-dated US Treasuries appear relatively attractive and can be a source of diversification.