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September 2018 Investment Monthly

Still a strong investment case for emerging market assets
03 September 2018
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    Key takeaways

    • We remain overweight global equities and local-currency emerging market (EM) government bonds. We also retain our underweight stance on developed market (DM) government bonds, and our neutral view on global investment-grade (IG) and high-yield (HY) corporate bonds
    • US stocks rallied in August on the back of strong earnings results and economic data releases
    • Speaking at the Fed’s annual central banking gathering, Fed Chair Powell continued to stress the gradual pace of monetary policy tightening in the months ahead
    • Eurozone activity growth is stabilising at a level which is consistent with robust GDP growth. This follows a moderation in activity earlier this year after a very strong 2017
    • The People’s Bank of China (PBoC) stepped up efforts to stem capital outflow risks. Signs of stabilising growth momentum in China should help investor sentiment
    • Over the past few months, Japanese wages and inflation data has started to pick up slightly, giving some credibility to the Bank of Japan’s inflation projections

    We remain overweight in EM assets amid improving valuations

    In 2018, EM economies have lost growth momentum and experienced a reversal of foreign capital flows. This has come amid increasing global trade tensions, rising US interest rates, a stronger US dollar (USD), and higher oil prices. Looking ahead, US-China trade tensions remain a risk to the outlook, although recent progress in US-Mexico trade relations is a positive development. Importantly, the structural characteristics of EM economies are significantly better than in previous episodes of EM market volatility, whilst recent policy easing in China should help support EM activity in the short-term. Meanwhile, the risk of a further spike in the USD is limited by a very gradual Fed tightening path. Overall, with the sell-off in EM assets having improved prospective returns, we retain our overweight stance. We find local-currency EM government debt particularly attractive.

    Elsewhere, our views are also unchanged. We continue to believe that global equities are the best asset class to benefit from still robust economic growth, and remain overweight. We also maintain our underweight positioning in DM government bonds, which continue to offer us low sustainable returns. Nevertheless, we find US Treasuries relatively attractive, particularly shorter-dated notes. Finally, we remain neutral global corporate bonds, with a preference for US and Asia, which we think offer better valuations than European counterparts.