Macro Matters August 2021

(Source: Merlea Macro Matters)

Summary

Renewed fears around the spread of a more contagious Delta variant of the COVID-19 virus, the lingering uncertainty about the inflation outlook, as well as how central banks would respond left markets treading water.

On the COVID-19 front, vaccination rates remain pivotal as case numbers rise in select parts of the world. Encouragingly, early indications are that the existing suite of vaccines have some effectiveness against the Delta strain, mitigating the anticipated rise in hospitalization rates or fatalities. This is a very different scenario to prior waves of COVID-19. Economic momentum also continues to be very strong. The forward-looking metrics, such as business surveys, have rolled off their peaks, but remain elevated in a historical context and bodes well for the global growth outlook for the second half of the year. Even with elevated valuations inequity market. I remain confident that a stimulative mix of easy monetary policy and generous fiscal support should build an increasingly synchronised global expansion—certainly among developed markets. However, this move may be close to its peak. In absolute terms, the strongest period of expansion may have been in the second quarter of the year. However, as the bounce from pent-up consumer spending fades, we expect business spending to fill the void and respond to higher levels of demand.

The second half of the year could be bumpier for financial markets, and there are a few risks we are watching out for in the latter half of 2021. One is the potential for choppy trading when the Federal Reserve begins to discuss slowing down its bond buying, which would be its first step away from the easy policies put in place during the pandemic. The time frame for that is not known, but many Fed watchers expect the central bank to begin the discussion at their Jackson Hole symposium in late August.

The second is again Fed related, and it is the fear that hot inflation readings are not really going to be as fleeting as central bankers expect, but that rising prices could become a bigger problem for the economy. The concern is that higher inflation readings could speed up the Fed’s timeframe on interest rate hikes, currently forecast by Fed officials to start in 2023.

Stocks have been moving higher as investors count on 40% profit growth this year and view those elevated inflation numbers as temporary. The economy is booming, and it heads into the second half following expected growth of 10.4% in the second quarter, according to Moody’s Analytics survey of economists’ forecasts. For the year, gross domestic product is expected to grow at a 7.2% pace. I believe the thing that will really get the market concerned is if the evidence builds there’s more sustained inflation. Then the Fed can talk all it wants, but everyone knows they’ll have to start moving sooner rather than later.  I have been surprised there hasn’t been a correction…The market is convinced that this inflation is not going to be something that becomes structural.

Private Equity

The Australian economy and response to COVID-19 has provided the perfect backdrop for a boom in M&A within the private markets. This buoyed economy, coupled with strong corporate governance in the local market, has led to low volatility and low interest rates, providing strong confidence for the private market to consider their M&A opportunities – whether that be a sale or an IPO. At the current pace 2021 will surpass the value and number of PE deals completed each year since 2006. Unsurprisingly, most of the megadeals have been in sectors that benefited from the pandemic and resulting disruptions. BGH Capital’s $1.3 billion proposed take private of ASX-listed Hansen Technologies Limited, and the sale of Mercury Capital-backed Message Media for $1.7 billion to Swedish software giant, Sinch, highlight Private Equity buyers continued strong appetite for technology-focused businesses. However, in the current environment, record valuations for such assets continues to be a problem for Private Equity managers competing against a soaring public equity market and strong competition from trade buyers on the private side.

Banking and financial services continues to be a happy hunting ground, with Private Equity managers putting large amounts of capital to work (eg Cerberus’ >$1 billion acquisition of Westpac’s auto finance business). The busiest sector, though, has arguably been infrastructure and core-plus, which saw an incredibly busy run of mega deals involving Private Equity  and other financial sponsor acquirers, including: a consortium led by IFM Investors making a $22 billion bid for Sydney Airport (which was subsequently rejected by the target board); the sale of a 49% stake in Telstra’s InfraCo Towers business to a consortium comprised of Future Fund, Commonwealth Superannuation Corporation and Sunsuper (managed by Morrison & Co) for $2.8 billion; Morgan Stanley Infrastructure Partners’ sale of its 40% stake in PEXA as part of the IPO, valuing PEXA at $3.3 billion; and the proposed $5 billion take private of Spark Infrastructure by KKR and Ontario Teachers’ Pension Plan

Bonds

So, for rest of 2021 bonds certainly offer lower yields than we’ve seen in recent decades, yields have been on a declining trend since the 1980s. Yet unsurprisingly the markets are being consistent, stock valuations don’t look too enticing either. Asset prices have been bid up as the broader markets see low and stable inflation over the coming years.

After peaking around the end of the first quarter, rates have moved sideways. At current levels, we believe the downside risk to yields is limited. In my view, the next catalyst that’ll trigger market rates to move higher will either be tighter monetary policy, which would come in the form of a timeframe around the unwinding of quantitative easing, or data surprises that force market participants to reassess what’s a broadly consensus and well-entrenched base-case expectation. For the moment,

markets are buying the Fed’s narrative that inflation pressures are transitory, but investors should monitor how the Fed balances financial repression with the noise around stimulus tapering.

That’s the key issue, if we continue to see tame inflation then bonds may be a useful holding and continue to help manage risk. However, should inflation rise, then both stocks and bonds may well fare poorly. Given those are the two major asset classes, that doesn’t make for simple asset allocation decisions, if you’re worried about inflation rearing its head.

Amidst a global backdrop that supports a resurgence in inflationary pressures, the Australian sovereign yield curve has steepened considerably over the past 12 months as evidenced in the Left  chart below. This steepness is particularly prevalent in the belly of the curve (ie. the 3 to 10 year point), reflecting the market’s expectation that the RBA will raise interest rates in the medium term. That said, steepness is also evident in the long end of the curve, indicating the potential for a structural shift higher in GDP growth over the medium to longer-term

The Right chart above shows the spread between three and ten-year bonds over time (i.e. the ‘3s/10s spread’). As can be seen, the current level is slightly below the widest point recorded in over 20 years, indicating that the belly of the ACGB curve is extremely steep. This relative steepness is expected to remain in the near-term, corresponding with the RBA’s recent narrative. Specifically, its commitment to accommodative monetary policy until such time as the labour market moves toward full employment, wages growth is materially higher than trend, and inflation is sustainably within its 2% to 3% targeted range. Consistent with this view, we believe that managers with a demonstrated track record in terms of carry and roll strategies will be well positioned to outperform. In bonds, a short duration stance is recommended, together with greater scrutiny on credit. When the Fed decides to announce tapering, investors could be forced to judge how that affects their credit exposure. Credit that is extremely sensitive to core yield movements should be avoided. Instead, the

focus should be on businesses with the potential to improve fundamentals and credit metrics (sales growth vs. debt growth).

Listed Property

REITs are well positioned to take advantage of a growing economy because they entered the crisis with historically strong balance sheets and access to credit and liquidity.  Nevertheless, uncertainties remain. Most critically, how will the future of office use evolve as firms return to the office and experiment with hybrid and work from home arrangements.

AREITs have since recovered significant ground with the vaccine announcement delivering a further boost. Still, the sector continues to trail the broader Australian equity market recovery (refer to above chart) which is an opportunity for investors focusing on the long term.

While all AREITs have recovered significantly from their March 2020 lows it is in the dispersion of that performance where opportunities lie. Those AREITs currently trading well below their pre-pandemic 2020 highs include Vicinity (down 40%), Scentre Group (down 34%) and GPT (down 27%) all of whom were burdened with additional Covid impacts (Lockdowns and the leasing Code). These names will recover, providing solid returns to investors focused on the long term.

AREIT performance is inextricably linked to the Australian economy. On that score, the ongoing recovery will be boosted by six factors:

  1. A return to the office will assist struggling CBD retail as foot traffic rises.
  1. Price growth in residential property and ongoing construction will boost retail, especially DIY and homeware categories and improving consumer confidence. Consumers’ willingness to spend, a key plank in the path for a return to pre-Covid life, should gather pace.
  1. The vaccine roll-out will further lift business and consumer confidence.
  1. The return of international tourism, potentially exceeding prior levels (revenge travel as consumers look to catch up), should have a similar impact.
  1. As will the return of international students, with residential and retail property clearly benefiting. Overseas students can also help us address current labour shortages.
  1. The return of immigration will be a major economic driver and, as with foreign students, residential real estate will be a major beneficiary, with flow-on benefits for office/retail and other real estate sectors.

With interest rates expected to remain “lower for longer”, Australian Real Estate Investment Trusts (A-REITs) are well placed to generate reliable levels of income, with the potential for capital growth.

For the past 12 months REITs returned 32.8%, outperforming the overall market, which returned 28.6%. Globally, REITs were up 2.6% in July in US dollar terms. For the past 12 months, Global REITs have returned 31.2% in US dollar terms.

Another topic of widespread discussion is the potential threat of inflationary pressures as the economy reopens. Recent inflationary signals reflect transitory items, and significant inflation fears may be premature or unfounded; nevertheless, REITs may perform well if inflation should increase. Historically, REITs outperformed in periods of moderate and high inflation, while providing competitive returns in periods of low inflation.

Australian Equities

The coming month is going to be make-or-break for a lot of companies as we begin to see earnings released in the upcoming Reporting Season. Since companies’ earnings were severely impacted during the COVID recession and share prices have since recovered with the ASX 200 reaching all-time highs, this has caused artificially inflated PE Ratios across the market. Based on current earnings I would say that the market is severely overvalued. The movement and recovery of share prices have thus shown sentiment that investors are expecting a full recovering in company earnings. If this reporting season severely falls short of expectation, we could see a market correction.

Following the loss of earnings, we saw companies cut dividends across the board, leading to a massive reduction in the average dividend yield across the market. Following the return of earnings, I am expecting to see dividends returning to attractive yields. Though you can’t expect past payout ratios, as many companies will elect to hold a large amount of cash on hand to strengthen their balance sheet against future uncertainties.

Across the market, I am expecting to see payout ratios increase by more than 10%. Which will have a big impact on the average yield rate.

The question will remain on investors’ mind as we learn of countries struggle to vaccine populations and contain the virus, and central bankers are looking for signs to start reducing liquidity and monetary stimulus, and bond yields might not stay at current depressed levels forever and always. The challenge for the Australian share market beyond August: how much growth is left beyond the initial V-shaped recovery?

The answer to that question might prove all-important because share markets are not cheaply priced.

But share buybacks, bonus dividends and an explosion in M&A announcements at the very least show there is a lot of (quiet) confidence on display. And confidence, as every economist and central banker will assure us, is extremely important for financial markets and economies alike. Investors will be hoping inflation will prove transitory and governments will figure out how to deal with the virus, as with climate change. Bottom line: the outlook for equities won’t be solely determined by profits and dividends

Global markets 

America

The second quarter earnings season has enjoyed an auspicious beginning—88% of companies in the S&P 500 that reported results through the end of July surprised Wall Street with better-than-expected earnings. But the real shocker could come in the guidance that companies offer for the third quarter and beyond. For example, even though some technology companies were “knocking it out of the park” in the most recent quarter, their guidance for earnings growth in the third quarter and beyond is flat or even lower, and expectations for growth ahead could put “a ceiling” on the stock market for the remainder of the year

Now the question is: What sort of levels of moderation in growth is going to be acceptable?” That’s because the extremely -high earnings growth—currently estimated to be 85% for companies in the S&P 500 during the second quarter, according to FactSet—can’t persist.

Furthermore, inflation continues to be a key topic for investors—and the Fed maintains that it’s largely a transitory phenomenon. I am watching two indicators for whether the inflation spike becomes an issue for the Fed.

The first is the Atlanta Fed Wage Tracker Annual wage growth, according to the Atlanta Fed Wage

Tracker was 3% in the year to May 2021 and has been trending lower since mid-2020. Rising wages will be a sign

that the labour market is approaching full employment. Wage growth near 4% will suggest the labour market is overheating, and that unit labour costs (wages minus productivity growth) will threaten a sustained rise in core inflation beyond 2.5%

The second is five-year/five-year breakeven inflation expectations. Longer-term inflation expectations—as measured by the five year/five-year breakeven rate—above 2.75% would also be a sign that the inflation spike is becoming entrenched. The Treasury Inflation Protected Securities (TIPS) used to measure the breakeven rate are based on the CPI, while the Fed targets inflation as measured by the personal consumption expenditure (PCE) deflator. The two move together over time, but CPI inflation is generally around0.25% higher than PCE inflation. A breakeven rate of 2.75%would suggest the market sees PCE inflation above 2.5% in five years’ time.

Wage growth above 4% and breakeven inflation expectations above 2.75% would see the Fed turn hawkish and bring an earlier start to rate hikes.

Europe

Following a shaky start to its vaccine rollout, Europe appears to be recovering as businesses are reopening and lockdowns continue to ease in some areas. As the European Central Bank debates the extension of its EUR 1.85 trillion asset purchase programme, due to expire next March, additional fiscal stimulus is being rolled out through the unprecedented European Union recovery fund, worth up to EUR 800 billion.

While the fund shows signs of growing unity among member nations, lines are being drawn once again as members take sides on scaling back monetary policies put in place amid the pandemic. Leaders such as Mario Draghi, Italy’s prime minister, warn that shifting back to austerity too soon could ignite another decade-long recovery like the post-global financial crisis period.

With Europe already lagging the US and China, shifting back to austerity too soon could prevent the region from heading on a path towards more sustainable growth.

While the late reopening of eurozone economies may hit the growth differential versus the rest of the world in the second half of this year, I remain sceptical of this view. First, I believe that this timing difference, in terms of peak growth, is well understood and therefore largely priced in markets. Second, with COVID-19 cases on the rise, economic activity may not rebound as strongly as expected.

While European stocks delivered significant upside in the first half of the year, in our view the eurozone’s longer-term outlook looks unappealing – with rising debt levels and growth that’s highly dependent on China and elsewhere. Through the crisis, the debt load on economies has increased meaningfully with total non-financial debt approaching 300% of the region’s output, albeit with divergences at the country level (see chart). This burden may dampen growth, for companies as interest expenses on the debt may continue to consume much free cash flow.

United Kingdom

 The Office for National Statistics confirmed that the UK economy grew by 0.8% in the month of May, well below consensus expectations of 1.5% growth, and much slower than the revised 2% growth achieved in April. Supply shortages and production bottlenecks were seen as an issue, with manufacturing output contracting by 0.1% in May, following no growth in April.

Most legal restrictions on social contact were lifted in England on 19 July. Although there was a pick-up in Covid-19 infections just prior to this date, daily infection rates unexpectedly tailed off as the month progressed, despite increased levels of social interaction. Fears around the potential consequences of a “pandemic” for the economy featured highly in the month. This was as many workers were advised to self-isolate by government’s Covid-19 app.

As appetite for risk returned, however, and markets bounced back in the second part of the month, many economically sensitive areas of the market performed well. Defensive sectors, meanwhile, struggled to make any progress during the second half of July. As a result, defensives underperformed economically sensitive areas over the month.

The market recovered well in the second half partly on the back of some very strong Q2 results, including from the basic materials, financials, and energy sectors. Meanwhile, economically sensitive mid-cap equities performed very well over the month as a whole – ongoing merger and acquisition activity was partly a factor here.

Japan

A state of emergency was re-imposed in Tokyo in early July, and spectators were banned from most Olympic events, with restrictions also extended throughout August. This led to near-term recovery expectations being pushed out slightly. Equity market sentiment was dominated by the worldwide increase in Covid infections, particularly driven by new variants. There was also significant concern domestically as infections picked up towards 10,000 per day nationwide in Japan. Given the size of the population, this remains well below the levels seen in many developed countries but nevertheless led to growing public anxiety. Opposition towards the government’s approach has been rising and, in July, public approval for the Suga cabinet fell to just 33%, the lowest level since he took office last September. Near-term prospects for the full recovery of the domestic economy are more dependent on the continued success of vaccine roll-out, which has continued to accelerate since late May. The Japanese stock market ended July at the bottom of its recent range, recording a loss of 2.2% for the month.

The market outlook though is mixed, with analysts divided over whether Japanese equities — which usually get a boost from a large medal haul — will rally in the months ahead as vaccination proceed apace. The alternative is that a growing wave of Covid cases and public disillusionment over the handling of the pandemic lead to political instability, worsening the underperformance of Japan’s stock benchmarks.

China

High uncertainty and extreme fear seem to be taking over investors in Chinese stocks, who appear to be taking a “sell now, ask questions later” approach. Yet for those with a long-term orientation, the current extreme pessimism could be a golden opportunity to either initiate or increase exposure to the best Chinese tech stocks.

While I lean more toward this being a good opportunity, there are also some big risks you’ll need to consider when investing in China. Chinese regulators have embarked on a wide-ranging crackdown on Chinese tech companies, with countermeasures ranging from anti-monopoly penalties to data-privacy investigations to new rules regarding overseas listings. The reasons for the crackdown given by Chinese authority’s centre around data privacy, especially in light of disclosures now required of Chinese companies listing in the U.S. And on Wednesday, July 7, it was reported that China was considering closing the loophole that allows Chinese companies to raise money overseas via variable interest entities located in the Cayman Islands.

The market sell-off of Chinese companies has accelerated in the past month due to increasing scrutiny from the Chinese regulators

It’s unclear if that regulation would go through and if it did, if it would apply only to new listings or also retroactively to companies that have already listed in the U.S. Given that China has four times the population of the U.S., a growing middle class, and a very advanced technology sector, it may seem like the current sell-off is a golden opportunity. After all, many leading tech stocks are now cheaper than their U.S. brethren, even though they have potentially larger addressable markets and growth prospects.

Furthermore, China has been through various “waves” of government regulation before, such as the anticorruption campaign launched a decade ago. Chinese stocks also took a huge hit at the onset of the trade war in 2018, but then eventually went on to make new all-time highs. So, there’s a decent chance this sell-off in Chinese stocks, like the others in recent years, will turn out to be a golden buying opportunity.

Emerging markets

In emerging markets, the pace of recovery has varied widely. China, Korea, and Taiwan all responded swiftly to control the initial outbreak and have been essentially open for several quarters now. (It’s worth noting that China has recently instituted lockdowns again to control outbreaks, and I feel breakthrough outbreaks will continue to happen.)

However, India endured a shocking second wave that overwhelmed the country’s healthcare systems as recently as May 2021, and Latin America also continues to suffer mightily in some areas. Though vaccination rates have started to trend up in emerging markets, the rollout in the first half of the year was slower than I had expected. One of the reasons for that is that relatively little vaccine manufacturing occurs in emerging markets.

I would expect the countries included in the asset class to begin to recover in earnest in the second half of 2021 and continue into 2022, a more prolonged recovery than I would have suspected three months ago. The virus isn’t the only factor playing a role in the emerging markets recovery. Rising commodity prices, buoyed in part by the global economic recovery, represent a tailwind for some. Not only do rising prices bolster the performance of commodity-producing companies, but they also help reduce fiscal and current account deficits in emerging markets economies.

An area where I see attractive valuations is in local currencies. Our outlook for emerging markets currencies continues to improve and is highly constructive over the medium term for several reasons. I believe the US dollar is likely to weaken due to the broadening of the global recovery, highly accommodative Fed policy, and growing US twin deficits. Also, central banks in many emerging markets have recently begun to normalize policy rates, and the widening of interest rate differentials within developed markets should further support local currencies. While emerging markets currencies have lagged other asset classes, particularly commodities which tend to be highly correlated to global growth, I would expect them to catch up.

Gold

Interest rates will likely remain a key driver for gold in the short and medium term. Yet, the negative impact that higher rates could bring will likely be offset by the longer-lasting effects and unintended consequences of expansionary monetary and fiscal policies created to support the global economy. These may include inflation, currency debasement, and higher exposure to risk-on assets in portfolios. Combined with attractive entry levels, these factors could prompt strategic investors to add gold to their allocation strategies and support central bank demand during the second half of the year.

However, while consumers may also benefit from the economic recovery and recent price pullback, new COVID variants may limit uptake in gold jewellery in key markets.

In my view, the central bank terms of “transitory” or “persistent” inflation and “full employment” will remain key areas of focus for investors and policy makers. Especially since diverging perspectives will influence market performance and level of interest rates.

While gold’s performance may not have countered the recent fall in yields, it could do so as investors position for a historically strong September. And if the Fed holds true to its recent comments and focuses more on employment, I would expect to see recent levels of high inflation become more persistent. During these periods gold has historically outperformed its long-term average, increasing by an average of 15% in years where US CPI has been higher than 3%. In addition, surging cases of COVID could also slow down the global economic recovery, which may hinder gold jewellery consumption but may also result in strong flight-to-quality flows for gold investment as it did during 2020.

WTIS

 Some soft spots have emerged in the oil demand recovery, but this is unlikely to change the outlook fundamentally. Members of the Organization of the Petroleum Exporting Countries and other producers including Russia, collectively known as OPEC+, agreed this week on a deal to boost oil supply by 400,000 barrels per day from August to December to cool prices and meet growing demand. But as demand was still set to outstrip supply in the second half of the year.

But as demand was still set to outstrip supply in the second half of the year.

Sector 12 Month Forecast Economic and Political Predictions
AUD 0.74c – 0.80c There has been a close relationship between the terms of trade and the value of the Australian dollar over a long period of time. The terms of trade measures the ratio of export prices to import prices. In general, an increase in the terms of trade is associated with an appreciation of the Australian dollar, while a decline in the terms of trade is associated with a depreciation of the Australian dollar. Commodity prices have a large influence on the terms of trade (commodities are goods such as iron ore, natural gas, and agricultural products).
Gold $1,700 – $1850

Hold

The US Federal Reserve held its conference at the end of the month and left many investors with some confusion regarding future action. The story for months has been

inflation and whether it will be “transitory” or not. Inflation is a positive for gold, and whether the recent spike is short-lived via the specific CPI methodology, there is a clear indication across other metrics that inflation is likely here to stay. The ECB also made a recent shift in its strategy to allow it to “overshoot” its target inflation levels.

Commodities WTIS US$70 – US$80

Hold

Energy is the only undervalued sector.

July was a very mixed month for commodities but, overall, I believe we are seeing signs consistent with nearing a cycle top. While there remain some near-term upside risks overall, I am expecting prices to find a peak in 2021 and to then start correcting through 2022. For crude oil, the agreement OPEC+ reached in July went a long way towards removing supply uncertainty from oil markets That effectively re-instates the OPEC+ put on crude prices that some were starting to doubt. Meanwhile, non-OPEC+ producers have been erring on the side of being cautious when it comes to investing in increased capacity.
Property This is a market for active stock-pickers. The Property Council issued the latest Office Market Reports which surprisingly showed most CBD markets (other than Sydney and Melbourne) with marginal reduction in vacancy rates. The aggregate vacancy rate for all office markets increased only slightly from 11.6% to 11.9%, however with net absorption in negative territory now for almost 2 years (on a national basis), the many proposed Office development projects are likely to be waiting longer for the right conditions to proceed with confidence. I expect that conditions will improve quickly as soon we get out of lock down and can re-open border and business.
Australian Equities 6880 – 7650

Reduce

This is a market for active stock-pickers.

I continue to see the markets higher at year end but remain cautious over coming months and believe there is a high probability of correction. I am taking a defensive positioning ahead of what could be a potential corrective drawdown of at least 10%,
Bonds 1.5% – 2.5%

Short duration warranted.

An inflation-linked bond fund might be a good addition if looking for more inflation protection.

Global yield curves are flattening, as long-term yields in major developed markets are falling due to COVID-driven growth concerns. I do believe that the 10-year Treasury yield should rise by year-end, but upside could be limited if global growth concerns keep international bond yields anchored. Market expectations for the first Federal Reserve rate hike continue to point to a late 2022 lift-off date. Expectations for the number of hikes have declined, however, as markets are only expecting rates to touch 2%, down from 2.5% at the end of June.
Global Markets
America S&P 500 3900 – 4300

Underweight

Second quarter is likely the peak growth rate for both the economy and corporate earnings, with positive economic surprises waning. Inflation remains the key issue for the market, and inflation jitters are likely to keep the S&P 500 in a tight range until early July.
Europe European Index

Hold

After a slow start, the vaccine rollout is gaining pace and Europe should be on track for economic reopening by Q3. The post-lockdown recovery is likely to be extremely strong and GDP should bounce back by around 5% this year following last year’s near 7% decline. Europe’s exposure to financials and cyclically sensitive sectors such as industrials, materials and energy, and its small exposure to technology, give it the potential to outperform in the post-vaccine phase of the recovery when economic activity picks up and yield curves in Europe steepen.
Japan Hold The overall monetary policy framework is likely to be maintained for the time being. The central bank expects negative interest rates to be cut further only in emergencies, such as a sharp rise in the yen. Financial support measures for companies will expire in September 21, but financial conditions for accommodations, restaurants and other services remain tight. If the situation continues, the measures are likely to be extended.
Emerging markets Hold

Prefer Asia Emerging markets

Reports about COVID flare-ups and new lockdowns raise legitimate concerns about the near-term growth outlook in emerging markets. EM equities overall have been range bound over the past 13 years. Only recently has the MSCI Emerging Markets Index recovered to its peak levels in 2007. From a valuation perspective, emerging markets equities offer compelling valuations trading at 17.2 times the trailing price-to-earnings (P/E) ratio as compared with the MSCI All Country World Index (ACWI) at 24.5x.
China Accumulate Chinese stocks could struggle in the second quarter, as policymakers seek to rein in risky lending and the economic recovery from coronavirus accelerates elsewhere in the world. Beijing’s focus had shifted to normalising monetary policy after cutting interest rates during the health crisis, which could sap liquidity from markets in Shanghai and Shenzhen. Regulators’ recent crackdown on fintech and ecommerce companies such as Jack Ma’s Ant Group and Alibaba had also weighed on investor sentiment.
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