Emerging Markets
Today, on a tactical basis, we are moving our allocation on EM hard currency bonds to neutral from underweight. In this <i>Special Report</i>, we elaborate on the reasons leading to this decision.
Please see attached our <i>Third Quarter Strategy Outlook<i/> which discusses the major investment themes and views we see playing out for the rest of the year.
Smart beta strategies can be useful in both strategic and tactical asset allocation. Combining different smart beta strategies can smooth out the cyclicality of individual strategy and provide a better return/risk profile.
Our strategic and tactical trades were up an average 24.6% in 2016Q2, led by strategic energy recommendations. Going forward, we continue to favor energy exposure over base and precious metals, ags and softs.
A number of divergences have emerged in global financial markets. These gaps are unsustainable. The recent improvement in Asian trade/manufacturing has been largely due to firming demand for electronics/semiconductors. Meanwhile, demand/output for industrial goods and basic materials - the areas leveraged to Chinese capital spending - remain weak. Fixed-income traders should bet on yield curve steepening in India: receive 1-year/pay 10-year swap rates.
There is no evidence of a sharp increase in China's state sector investment in recent months. This, together with the cautious private enterprises, explains why overall Chinese investment has remained downbeat. Public sector investment spending will likely accelerate going forward, which should continue to support business activity.
Post-Brexit uncertainty will continue for some time. But we were already cautiously positioned, and would not go any more defensive.
The Brexit vote has ended the reflation trade, but does not represent a "Lehman moment" either. Stick close to benchmark in terms of broad asset allocation, and watch European bank CDS for signs that another financial crisis is brewing.
The Russo-Chinese relationship got a diplomatic boost this week, but can China provide Russia with the capital it needs to boost productivity meaningfully?
Rising policy uncertainty is negative for global equity multiples.