Log in Open account
Singapore
Equity Monthly: Can EM shares find their footing?

Equity Monthly: Can EM shares find their footing?

Equities
Peter Garnry

Chief Investment Strategist

Last month’s Equity Monthly focused on China setting up the premise of its own centrality to world affairs. But while China is destined to become the world’s largest economy, the country is currently experiencing a slowdown due the US-imposed tariffs and a general weakening of the massive, post-2015 impulse that has swept the Chinese economy forward for more than two years.

Among the latest fragments of evidence for a weaker China was the worse-than-expected Q2 technology earnings season, which saw many of the country's tech giants expand heavily into new businesses to secure top line growth at the expense of profit margins. Today, Chinese carmakers tumbled around 5% as Great Wall Motor announced an aggressive pricing campaign to maintain market share as the Chinese auto market has retreated to its slowest rate of expansion since early 2012. Growth has barely been above zero over the past 12 months and competition is increasing. This will likely hurt operating margins, and it could be the story that clings to Chinese equities over the coming quarters.

The current regime is a puzzling one. The Federal Reserve’s policy normalisation and Trump’s trade war is a benefit, at least in financial markets, to US equities at the expense of everyone else (see the trade war ETF basket chart below). Looking at economic forecasts for the G10 countries, only the US' has been raised while all others have headed lower. Our view is that US outperformance can continue for a bit longer, but a major swing is getting closer.

Trade War ETF basket
EM is decoupling in Fed’s rate normalisation

For the first time since 2008 we are experiencing a decoupling between developed and emerging market countries and equities. The two blocs have moved in tandem over the past decade with EM showing more downside volatility, but the direction has been synchronised. In 2018, the direction has inverted, as shown in the chart below. In our view, this is a sign that Fed’s monetary tightening is beginning to have an impact on the weakest link of the global economy: countries with structural current account deficits.

The Fed is confident enough to pursue an additional two interest rate hikes this year, but 2019 looks increasingly troublesome. On top of Fed normalisation, President Trump’s trade policy is strengthening the USD and adding further pressure on EM. Deep cracks have opened in countries such as Turkey, Argentina, South Africa, Brazil, and China. As a policy responsem China has added stimulus through the fiscal and monetary channels on top of recently announced automatic stabilisers (as seen in Europe). These moves will counter some of the effects and eventually change China's fortunes. 
MSCI World (blue) versus MSCI EM (orange)
MSCI World (blue) versus MSCI EM (orange, source: Bloomberg)
It is our view that investors should slowly begin adding exposure to EM even though the timing may be too early. In an August 10 Trade View, we presented the case for EM – essentially China, India, South Korea, and Taiwan – as both fundamentals and technical (mean reversion) suggest an interesting setup for being long EM equities and short US equities. As said, the timing could be too early; Trump may announce an additional $200bn in tariffs on Chinese goods, for instance, but the majority of the impact from this move is likely priced in.

The bar is set so low that the slightest upside surprise on trade will likely push Chinese/EM equities higher by 5%

Stay defensive, keep technology

Our message on equity positioning remains as it was in August. We favour the two defensive sectors, health care and consumer staples, while continuing to also favour technology stocks (up 6.5% in August, measured in USD). Health care and consumer staples have low interest rate sensitivity and have a historical tendency to offer downside protection in cases of increased volatility. The technology sector has increasingly become more defensive because of very low interest rate sensitivity., but most importantly it still has the best upside potential in growth terms.
MSCI Technology Sector
MSCI Technology Sector (five-year, source: Bloomberg)
On our daily Morning Calls, we have pushed the idea that European equities should strategically be underweighted as the continent’s equity market has few catalysts. Europe is export-driven and thus vulnerable to current trends of nationalism and protectionism. In addition, the two largest sectors in global equities, technology and financials, are either non-existent for the former and very weak for the latter, making European equities less attractive.

European equities are only interesting as a tactical bet when there is a positive change in the global economy due to their large exposure to materials and industrials.

Overweight equities versus bonds

With a global recession still at least 12 months out on the horizon based on the current available data, equities should still be overweighted versus bonds. Global equities are still not expensive in outright terms (see chart below) given earnings growth and global economic activity. The global bond market is still not offering an attractive alternative to equities as a yield component in any portfolio. Previously, bonds could offer both return and diversification during stressful periods; now, the yield component is gone but bonds should still be used to hence downside diversification.

Even US bonds remain unattractive for foreign investors as the interest rate differential is eaten up by currency hedging unless non-US investors want to assume the USD risk, but with the trade-weighted USD trading 13% above the historical average since 2006, it seems like a risky proposition.
MSCI World Index
‪

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
    Read full article
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

    Read full article
  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
    Read full article
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
    Read full article
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

    Read full article
  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
    Read full article
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
    Read full article
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
    Read full article
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
    Read full article
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
    Read full article

Disclaimer

 The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore
Products & pricing
Platforms
Accounts & service
General
Other
Legal

Losses can exceed deposits on margin products. Please ensure you understand the risks.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.