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Emerging market equities – reasons to expect another turning point

Emerging market equities – reasons to expect another turning point

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Emerging market equities have suffered another decade of underperformance versus developed markets. Recently, their underperformance has been more marked relative to US markets than the rest of the world. With sentiment having already brightened in developed markets as the COVID-19 lockdowns are eased, and valuations, particularly in the technology sector, having become elevated, this may be a good time to rotate into EM equities.

In the near term, the commodity-sensitive Latin America and EMEA regions should outperform as crude oil and metal prices continue to recover, while equity markets in China may lag due to US election-related political tensions.

Over the medium term, however, the effects of China’s large fiscal boost to the economy should feed through to the rest of the region and the dominance of Asia, and in particular of Chinese technology, should reassert itself.

The long and short of it

The long-term drivers of emerging market equity outperformance are well known:

While these are all generally true, the market has moved to its own rhythms. Since 1975, periods of EM outperformance and underperformance have cycled over roughly 10-year spans, with the latest wave of underperformance beginning in 2010.

The most recent period is unique, however, in that since 2013, the underperformance of EM has been largely against the US, while against the rest of developed market equities, returns have been in line.

Performance divergence is mainly due to tech stocks

As with so many markets these days, the technology sector explains much, though not all, of the divergence in performance. Emerging markets have underperformed the US in most sectors, including

  • information technology
  • healthcare
  • consumer discretionary (recall, this sector includes the world’s largest internet store)
  • industrials.

Compared to developed market equities excluding the US, the lagging sectors are similar with the significant exception of IT. Given the low weight of tech in the MSCI World ex-US index, the outperformance of emerging markets tech easily offsets the losses in the other sectors, leading to a flat performance overall (see Exhibit 1).

Could we be at another turning point in emerging market equity performance?

At least in the near term, there are reasons to believe this may be the case. Developed countries have largely passed through the worst of the coronavirus pandemic and are in the process of managing their exit from lockdowns. While we expect one, or several, second waves, it is unlikely nationwide restrictions will be imposed to the same degree. One reason is that the economic cost may be prohibitive.

Also, with the knowledge gained over the last several months about the effects of the virus, we now know that vulnerable populations (notably those over 55, who have accounted for 93% of deaths in the US), can be protected without having to confine children and a vast share of the working age population.

Developed market equity performance has also ready reflected this comparatively more optimistic outlook, however, since March. By contrast, many emerging markets are either still in some stage of lockdown or only slowly exiting them, often unwillingly, and the economic rebound has yet to occur. Another reason for optimism is the outsized fiscal and monetary stimulus in China, which is nearly on par with the stimulus in 2015-2016. If history is any guide, this support should not only benefit the Chinese economy, but also other emerging markets, though in 2015-2016, it took several months before the relative performance of the markets reflected the impact (see Exhibit 2).

Valuations are a further factor in favour of emerging markets. The price-book ratio of the MSCI EM index relative to that of the MSCI World index is near the lows since 2003. For the IT sector, relative multiples have rarely been this low since the tech bubble in the late 1990s.

On a price-to-next-twelve-month (NTM) earnings basis, relative multiples are similarly near levels not often seen since 2005 after which there was an extended period of EM outperformance.

What are the risks?

Ahead of November’s US presidential election, it is reasonable to expect heightened anti-China and anti-trade rhetoric from President Donald Trump. During the worst of the trade war, emerging markets and particularly China underperformed the US. That said, the political calculation could also support at least another interim resolution as a rising stock market could still be one of Trump’s strongest claims to re-election.

The economic rebound in emerging markets ex-China may not be as strong as that in the developed world as most emerging markets do not have the same capacity for fiscal or monetary stimulus.

The collapse of many EM currencies, while helping exporters, will pose a problem for companies with significant hard currency debts.

Moreover, weaker currencies will be of less benefit to exporters when global trade is likely to remain subdued and many developed countries wish to re-shore production. We will address some of these nuances in the part two.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this podcast do not in any way constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Daniel Morris. The post Emerging market equities – reasons to expect another turning point appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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Tesla rival Stellantis unveils its lowest price electric vehicles

The Big Three automaker unveils details on its low-priced electric vehicles that will be delivered over the next two years.

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Electric vehicle manufacturers have realized that the prices of their cars are making it more difficult for many of them to compete against makers of lower-priced internal combustion engine vehicles.

Tesla saw its third quarter deliveries fall below market estimates, prompting Elon Musk's company in early October to lower the list price of the Model 3 from $40,240 to $38,990 and its industry leading seller Model Y has recently fallen from $47,740 to $43,990.

Related: Tesla Japanese rivals debut concept vehicles in latest challenge

Tesla top rival Ford already cut the price of its all-electric Mustang Mach-E by up to $4,000 in May and its F-150 Lightning by about $10,000 in July.

Stellantis revealing entry-level electric cars

Stellantis  (STLA) - Get Free Report has been busy revealing low-priced entry-level electric vehicles that it plans to begin selling in 2024 to compete with French automaker Renault in Europe as well as Chinese EV companies. The company in August said it would unveil a second new entry-level Fiat-branded electric vehicle in July 2024 that will be priced less than €25,000 or about $27,390. The company, however, didn't say when the vehicle might be sold in the U.S.

The company said in June that it will deliver the new Citroën e-C3 electric car to Europe in early 2024. The Citroën e-C3 was expected to have a range of 186 miles on a charge and would be among lowest priced EVs on the market. Stellantis had already said it would bring Fiat's best-selling EV, the Fiat 500e, to the U.S. market in 2024 to compete against Tesla and the growing U.S. EV market.

Citroën e-C3 all-electric subcompact hatchback.

Stellantis

Big Three automaker unveils its low-priced electric vehicles

Stellantis on Oct. 17 revealed its updated all-new, all-electric Citroën e-C3, which is its first European-designed, European-built B-segment, or subcompact, EV hatchback. The new vehicle is now estimated to have a 199-mile range, charging 20% to 80% of capacity in as little as 26 minutes. The EV accelerates 0 to 62 mph in 11 seconds with a provisional top speed of 84 mph for everyday driving and traffic in urban and suburban areas.

The company estimates that the vehicle will be priced below £23,000 ($27,900) in the UK. No word yet if the Citroën e-C3 will roll out in the U.S.

In 2025, Stellantis will offer a Citroën e-C3 with a 200 km- or 124-mile range and priced at €19,990 or $21,068, the company said. That price would be lower than any new EV sold in the U.S. today. General Motors  (GM) - Get Free Report Chevy Bolt's lowest manufacturer suggest retail price is $26,500, while the 2024 Nissan  (NSANY) - Get Free Report Leaf has a starting price of $28,140.

The new Citroën e-C3 will be available in three versions You, Plus and Max. The You version's standard equipment includes LED headlights, Citroën Advanced Comfort Suspension, Active Safety Brake, the new Citroën Head Up Display, ‘My Citroen Play with Smartphone Station’ for infotainment, electric door mirrors, auto lighting, rear parking radar, rear spoiler, cruise control, manual air conditioning, and six airbags.

Plus vehicles include 17-inch alloy wheels, Citroën’s two-tone paint with contrasting roof, decorative roof rails, front and rear skid plates, the 10.25-inch color touchscreen with smartphone mirroring, Citroën Advanced Comfort Seats, auto wipers, power-folding and heated door mirrors, leather-effect steering wheel, 60/40 folding second-row seat, and driver seat adjustment.

The premium Max version additionally has LED rear lights, rear privacy glass, enhanced seat textiles, automatic air conditioning, 3D navigation, wireless charging, rear camera, electrochrome rear-view mirror, and rear power windows.

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Putin, Xi In Beijing Pitch For ‘Alternative World Order’ As Biden Departs A Burning Middle East

Putin, Xi In Beijing Pitch For ‘Alternative World Order’ As Biden Departs A Burning Middle East

As a Rabobank note has highlighted, the main…

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Putin, Xi In Beijing Pitch For 'Alternative World Order' As Biden Departs A Burning Middle East

As a Rabobank note has highlighted, the main theme on display during Xi Jinping and Vladimir Putin's Wednesday talks in Beijing was one of "common threats" bringing the two "dear friends" closer, according to a press readout. Observed Rabobank earlier in the day, "Meanwhile, as the Middle East rages and the West recoils, Xi Jinping welcomes Russia’s Putin and a host of Global South leaders, ex-India, to his Beijing Belt and Road Forum to talk about what an alternative world order might look like. The ‘global’ Western press mostly failed to even cover it."

Putin said at a media briefing following the meeting with his Chinese counterpart, "We discussed in detail the situation in the Middle East." He added: "I informed Chairman (Xi) about the situation that is developing on the Ukrainian track, also quite in detail." The Russian leader then emphasized: 

"All these external factors are common threats, and they strengthen Russian-Chinese interaction."

AFP/Getty Images

CNN subsequently called it a "pitch for a new world order" at a moment crisis has gripped the Middle East.

Yet, almost simultaneously, Bloomberg reported that Biden is overseeing a fast unfolding disaster in the Middle East:

President Joe Biden’s 7.5-hour trip to Tel Aviv signaled full US backing for Israel but fell short on another key goal: winning over Arab leaders.

Amid growing signs the conflict may be spinning out of control, Biden made plain that the US will protect its ally, sending a clear message to rivals in the region like Iran to stay out of the fight. With one US aircraft carrier in the area and another on the way, Biden promised a new package of “unprecedented support.”

The Bloomberg headline aptly reads, "Biden’s Whirlwind Israel Trip Fails to Calm Fears of Wider Middle East Conflict." At this time, Lebanon, Jordan, and Egypt are on edge - with Western and Saudi embassies reducing staff and issuing travel advisories. 

Meanwhile, related to Xi's Belt and Road (the purpose of the gathering in Beijing), Putin praised the potential for it to usher in a "fairer, multi-polar world" as Moscow and Beijing grow closer based on "deep friendship"

In his speech at the opening ceremony, Putin hailed Xi’s flagship foreign policy Belt and Road Initiative as “aiming to form a fairer, multi-polar world,” while touting his country’s deep alignment with China.

Russia and China share an “aspiration for equal and mutually beneficial cooperation,” which includes “respecting civilization diversity and the right of every state for their own development model” – he added, in an apparent push back against calls for authoritarian leaders to promote human rights and political freedoms at home.

This is at a moment Putin is "wanted" by the International Criminal Court (ICC) and shunned and sanctioned by the West, while at the same time Global South countries are expressing growing anger at Israel's unrelenting bombing of the Gaza Strip, as the Palestinian death toll soars into the thousands.

Directly related to this, a Thursday UN Security Council resolution brought by Brazil and seeking a ceasefire in Gaza was shot down, given the US was the only "no" vote.

Also missed by the mainstream media was the following pro-China sentiment expressed by a top Palestinian official over a week ago:

China will soon lead the world, and it supports the “Palestinian position, whatever it may be,” according to Fatah’s Central Committee member Abbas Zaki.

In a public address that aired on Palestine TV on Sept. 29, Abbas Zaki called on the United States to “reconsider its stance” with regard to Israel or risk becoming irrelevant. The Israelis, he said, were “sons of bitches,” “murderers” and agents of instability, while the Palestinians are “messengers of peace.”

“I know that there is serious change in Europe and even in the United States,” said Zaki.

But, he added, “do not forget the emerging camp, which is on your side—the Chinese camp. China is going to lead the world, and it proclaims: ‘There can be no stability and progress without the liberation of Palestine, with East Jerusalem as its capital.'”

Putin too, has expressed more sympathies with the Palestinian side, days ago warning Israel of the "catastrophic" death toll its attacks on Gaza will result in. He has also held calls with Arab leaders, seeking to mediate peace and a possible two-state solution.

Tyler Durden Wed, 10/18/2023 - 19:40

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Survey delivers bleak news for remote workers

Remote work is increasingly under fire.

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Covid-era alternative work solutions have come under fire as businesses increasingly deploy a carrot-and-stick approach to convincing employees to return to offices.

Technology titan Meta Platforms  (META) - Get Free Report, which owns Facebook, threatened poor performance reviews if workers failed to attend offices three times weekly. JP Morgan Chase  (JPM) - Get Free Report CEO Jamie Dimon recently suggested workers uncomfortable with returning to offices should look for employment elsewhere.

Workers don’t like the idea of giving up the flexibility afforded by remote work, but a recent survey shows that these workers may face an uphill battle if they hope to continue working from home.

A woman working on a laptop in a cafe, on Sept. 14, in Edmonton, Alberta, Canada. (Photo by Artur Widak/NurPhoto via Getty Images)

NurPhoto/Getty Images

Remote work loses its luster

Companies big and small rushed to offer flexible alternative work schedules like remote and hybrid work during Covid. Remote work quickly became a key benefit used to fill jobs created by those who took early retirement and newly created positions in response to demand growth fueled by easy-money policies.

Related: Facebook issues more tough-luck news to workers

Remote work initially appeared to be a win/win for companies and employees. It allowed businesses to source job candidates nationally rather than locally and sometimes save money by closing expensive offices. Meanwhile, workers could live in the suburbs rather than crowded cities and save money by eliminating expensive childcare costs.

Unfortunately, the love affair with remote work has soured over the past year.

Businesses, from technology to financial services, have rolled back remote work, citing a need for increased collaboration and greater productivity. Many companies have likely sought to reduce the number of remote workers as part of layoff plans or to fill otherwise vacant office spaces.

Businesses are winning the return-to-office battle

Worker surveys suggest employees prefer remote work. However, they’re losing the battle with employers demanding more office face time.

The Census Bureau’s latest Household Pulse Survey shows remote work has reached a new post-pandemic low, with declines seen in all 50 states, reports Bloomberg.

More Jobs:

The survey showed that fewer than 26% of households include someone who works remotely at least one day weekly. That’s a significant drop-off from the high of 37% in 2021. A total of 31 states had remote work rates above 33% at the peak. Now, only seven states exceed that hurdle.

States with the highest percentages of remote workers are typically Democratic states, mainly on the east and west coasts. Middle America and the South boast some of the lowest rates of remote work.

There’s also a more significant push for a return to office (RTO) in major metro markets where office building valuations are tumbling because of empty offices. During its recent quarterly conference call, Goldman Sachs  (GS) - Get Free Report told investors that it reduced valuations on office properties in its portfolio by 50%.

The impact of lower valuations on financial companies could contribute to the stricter return to office demands. Big banks like JP Morgan have been among the most vocal in demanding RTO, and they’re also heavily exposed to commercial real estate.

For instance, in addition to loans held on commercial properties, JP Morgan is building a new multibillion-dollar headquarters in New York City.

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