- Strength of U.S. dollar and Japanese yen should improve margins and profits of EM Asian companies
- Any decline in oil prices is a positive for crude-importing EM Asia
- The Fed and EM central banks have turned dovish, a positive for EM assets
Global uncertainties, post-Brexit political ramifications in the UK, the possibility of similar EU-exit referendums, potential tariff wars, and protectionism are all risks that could hurt investments and global growth. That would hurt EM net exports, albeit to an as-yet undeterminable degree. However, weaker EM currencies, lower commodity prices, and benign global interest rates should help EM Asia in particular. EM Asia growth may get shaved by 30-100 basis points, mostly through trade impact, in our view. Otherwise, the impact of Brexit on EM Asia should be muted.
Weakness in the Chinese yuan in the second quarter created widespread market concerns. The Bloomberg CFETS RMB Index indicates that the yuan depreciated 3.2% against the currency basket in the second quarter. Meanwhile, China’s foreign exchange reserves data showed net accretion of U.S. $13.5 billion at the end of June, allaying fears of further depletion in reserves. While the PBoC may have used the markets’ focus on Brexit to engineer currency depreciation, we do not expect continued and substantial yuan weakness. China enjoys a current account surplus, and all credible estimates put the Chinese yuan close to fair valuation at this point.
We see stability in the Chinese economy ahead, with consumption increasing as the dominant growth contributor. Elsewhere, in India and Southeast Asia, growth remains robust. India, Indonesia, and the Philippines have seen post-election leadership changes and political consolidation and stability. Healthy monsoons in India, along with constructive and investor-friendly legislative actions across the region, may rekindle investment demand in EM Asia, and the low interest rate environment should help.
EM equities have outperformed U.S. equities year-to-date (USD), after years of significant underperformance. However, this outperformance was driven primarily by currency moves and bottom-fishing in a few markets like Brazil and Russia. We remain cautious on EM equities in the near-term, as global uncertainties remain as headwinds.
We are confident about the fundamentals of companies in the City National Rochdale Emerging Markets strategy, whose exposure in EM Asia is focused on domestic consumption and new economy businesses. We do not see any material impact from Brexit-induced market volatility on our portfolio earnings at this point.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.
Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.
Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as on the date of this document and are subject to change.
There are inherent risks with equity investing. These risks include, but are not limited to, stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
Concentrating assets in the real estate sector or REITs may disproportionately subject a portfolio to the risks of that industry, including the loss of value because of adverse developments affecting the real estate industry and real property values. Investments in REITs may be subject to increased price volatility and liquidity risk; concentration risk is high.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the Federal Alternative Minimum Tax (AMT) and taxable gains are also possible. Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.
Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets. Emerging markets bonds can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.
Returns include the reinvestment of interest and dividends.
Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.
Past performance is no guarantee of future performance.
The Standard and Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
The U.S. Treasury 10 year note is a debt obligation issued by the United States government that matures in 10 years. A 10 year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity.
The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.
The Barclays U.S. Corporate High-Yield Index covers the U.S. dollar denominated, non-investment grade, fixed rate, taxable corporate bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.
The Barclays Emerging Markets USD Aggregate Bond Index is a flagship hard currency Emerging Markets debt benchmark that includes fixed and floating-rate U.S. dollar denominated debt issued from sovereign, quasi-sovereign, and corporate EM issuers.
The Bloomberg CFETS RMB Index is an index replica of the trade weighted CFETS RMB Index, which tracks the yuan against 13 currencies.
The U.S. Dollar Index is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.
Indices are unmanaged, and one cannot invest directly in an index. Index returns do not reflect a deduction for fees or expenses.