2019 Midyear Market Outlook

Looking Beyond the U.S.

Emerging markets equities have potential for improvement,
despite bumps from tariff concerns short-term.
Geopolitical risk will undoubtedly be an important and ongoing focus for the market in the months ahead. This will, in our view, centre around two key areas: first, U.S.-China trade tensions, and second, Brexit visibility (and the ongoing uncertainty of its outcome). The former will feed into the longer-term outlook for Chinese and U.S. economic momentum, and by extension, drivers of global economic growth. Although Chinese authorities have continued to take action this year to avoid a hard landing for their economy, there is the ongoing risk of a weakening of momentum at this stage.

This will in turn lead to a secondary focus for the market on the macro front, namely the need to assess monetary policy actions across the regions. The U.S. Federal Reserve has been more vocal about the potential need for interest rate cuts, as has the European Central Bank, so a more accommodative monetary stance is likely to be a theme for the rest of the year and beyond.

On the economic growth front, leading indicators are weak across all regions, which highlights downside risk to GDP estimates and earnings forecasts. In our view, equity valuations are relatively more supportive in Asia and Europe than they are in the U.S., although the backdrop of weakening economic momentum means that monetary policy assessment has become an important aspect to consider when assessing both direction and style leadership in the market.

Impact of Tariffs

We believe that the current impasse over tariffs has minimal potential to affect the long-term outlook for equity markets. Our view on the long term has not changed – we continue to see a lack of inflationary pressures, and in fact, strong underlying deflationary currents brought by technological disruptions. In this environment, we continue to focus our fundamental research work on finding undervalued companies with attractive, sustainable returns, good growth profiles, and strong balance sheets, as well as those that offer good compounding characteristics over the long term.

The EM Opportunity

On a 10-year view, looking at current basic price-to-book (P/B) value versus history, emerging markets in aggregate (as measured by the MSCI EM Index) are at a wide valuation discount compared with world equities as a whole (as measured by the MSCI World Index. This is despite the fact that the EM equities offer very similar profitability and better aggregate profit growth potential. In our mind, this presents a compelling opportunity for long-term investors. What’s more, the EM market opportunity (as measured by the EM index) has also undergone a powerful shift in nature, becoming materially less weighted to resources and more weighted to the information technology and consumer sectors over the last 10 years.
MSCI EM vs MSCI World P/B Ratio from 30 Jun 2009 to 30 Jun 2019
Source: Bloomberg, as of 6/30/19. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Focus on Asia

Looking regionally, there is reason to be positive about China. Valuations are reflecting much of the uncertainty about the trade situation, and longer-term secular growth opportunities are now being mispriced. Indonesia should benefit from more accommodative monetary policy globally; consumer sectors are cycling through the difficult growth environment and the outlook is improving.

Meanwhile, in Hong Kong, while the local economy is more sensitive than most to problems in the overall trade environment, we believe the stock market includes companies with really attractive long-term secular growth characteristics. Apart from the obvious impact of money flows that will be needed to avoid unwanted deviations from benchmarks, we see the inclusion of A shares in major indexes as likely to drive the Chinese equity market forward in terms of corporate governance and a greater focus on ESG factors. We also see further inclusion as likely to drive a further reform and liberalisation of capital markets. 
2019 Midyear Outlooks
Brandywine Global
Growth: Turning a Corner
Clarion Partners
The Momentum Continues
ClearBridge
Cautious Optimism for Equities
EnTrust Global
Realistic About Risk
Martin Currie
Looking Beyond the U.S.
QS Investors
Where Do We Go from Here?
RARE Infrastructure
U.S.-China: Fallout from Trade Tensions?
Royce & Associates
Cyclical Thinking
Western Asset
Resilient Growth, Despite Uncertainty

Definitions

The MSCI World Index is an unmanaged index of common stocks of companies representative of the market structure of 22 developed market countries in North America, Europe, and the Asia/Pacific Region. The index is calculated without dividends, with net or with gross dividends reinvested, in both U.S. dollars and local currencies. Please note an investor cannot invest directly in an index.

The MSCI Emerging Markets (EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The price-to-book (P/B) ratio is a stock's price divided by the stock’s per share book value.

A shares, also known as domestic shares, are shares that denominated in Renminbi and traded in the Shanghai and Shenzhen stock exchanges, as well as the National Equities Exchange and Quotations.

ESG is an abbreviation for Environmental, Social and Governance

Gross Domestic Product (GDP) is an economic statistic that measures the market value of all final goods and services produced within a country in a given period of time.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

"Brexit" is a shorthand term referring to the UK vote to exit the European Union.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

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