Focus on fundamentals: virus volatility provides entry points for EM equities

Friday 31 January 2020

Research / Market

  • Overview: The coronavirus has been the strongest driver behind the recent volatility in financial markets, providing the trigger for a break in the rally in risk assets, which had been running uninterrupted since October.We should be aware that the trough for markets could be well in advance of the peak of the epidemic, as markets tend to overreact at the beginning of a crisis and then stabilise and rebound, despite the continuation of the negative news flow.
  • Overall assessment: Unless the “elevated uncertainty” is able to derail the global economy into a shock – which is not our scenario now – excessive downward setbacks in prices could provide entry points for asset classes with attractive valuations and good fundamentals. In particular, we see selective opportunities in EM equity given the reacceleration of earnings growth, attractive valuations and the prospect of a weaker USD. The short-term issue due to the Chinese situation is an opportunity to add to this asset class, barring any disruption to the global outlook.
  • Multi-asset view: Against the current backdrop, we believe that a diversified risk allocation could help investors navigate this phase of uncertainty. We have a risk-on stance, favouring European equity and European credit, as we believe that the economic picture has not fundamentally changed, but we believe that investors should keep (or potentially increase in the most conservative allocation) hedges against tail risks or reduce their exposure to a single risk driver. “Growth” is the main driver for markets now. To contain the volatility in portfolios by playing a cyclical rebound, we have downgraded to neutral our view on EM FX, which is more vulnerable to short-term volatility. This is a tactical assessment: this year we believe that EM FX will provide opportunities to investors once the situation in China normalises.
  • Emerging markets view: On the equity side, we have become more cautious on Chinese tourism-related sectors such as hospitality, aviation and consumer discretionary. However, we will continue to closely monitor quality consumer discretionary companies that could provide entry points should stock prices fall significantly. On the fixed income side, there will be some negative impact from weakening currencies, but this will be partly offset by the downward pressure on global yields. We think hard currency bonds are likely to be less impacted as the negative impact on spreads is likely to be largely offset by lower moves in core yields.
  • Global fixed income view: As the fundamental picture has not changed, we believe investors should remain focused on hedging key risks rather than changing their allocations on the back of a volatile news flow. We favour US treasuries, which are proving a good hedge as safe haven assets and have performed well so far. Investors should also favour currencies such as GBP and EUR, which have proved to be relatively isolated from the outbreak.

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Global Investment View
31/01/2020 Research / Market

Global Investment Views - February 2020

At the start of the 2020s, markets continued to be dominated by geopolitical issues, with short-lived Iran tensions at the forefront initially, followed by the news regarding a phase one trade deal between the US and China. Now, growth expectations are becoming the main driver of the market. That’s why the recent volatility due to the news about the spreading of the corona virus in China is higher than in the case of US-Iran tensions, as the epidemic could harm China (and global growth) if not contained soon (not our base case at the moment). Other than this issue, recent data point to a ‘so far, so good’ assessment as Germany has avoided a recession and the Euro area is bottoming out. Inflation uptrends are materialising to some extent, but risks appear to be limited and the overall inflation outlook remains benign. Central banks are likely to continue to pause on policy changes, which should help to maintain dovish financial conditions across regions. Therefore, in the search for further growth, attention is globally moving towards fiscal measures: Japanese stimulus package; approval of 2020 Budget Laws for Indonesia, the Philippines and India; and hopes for support in Germany, the UK and broader Europe (€1tn European Green Deal).