Emerging Markets
Investors should underweight global equities and risk assets; overweight US stocks relative to global; and overweight defensive sectors versus cyclicals.
A global portfolio is likely to return only 5.3% a year over the next decade, compared to 6.7% in the past. Investors either need to lower their return expectations, or take more risk. Our total return methodology remains consistent with previous editions, with changes limited to the Alternatives section.
China removed checks and balances in its political system to deal with a very dangerous economic transition. The transition is going badly, yet investors cannot rely on checks and balances to correct or prevent policy mistakes. The Taiwanese election is a looming bellwether.
In part 2 of this series, we discuss mainstream EM equity valuations and present the results of our cross-country analysis. The goal is to identify overweights and underweights within an EM equity portfolio.
Most diagnoses of China’s liquidity trap miss the point that policies arising from these theories were developed for market-based economies with governments accountable to their electorates, not autocracies pursuing autarky. As the CCP widens and deepens mass-mobilization campaigns, the echo of the Cultural Revolution will grow louder and lead to further retrenchment by households and firms. China has space at the center for significant fiscal stimulus, which, if deployed, could break its liquidity trap and boost commodity demand.
