There were signs in the last quarter of 2018 that the growth/technology stocks that had led the bull market were flagging. However, market momentum remains strong, and global consumer brand companies such as Unilever and Diageo are still loved.
The Chinese bear market in shares has lasted since the peaks reached in the summer of 2015.
The index of share prices for the Shanghai market has halved since June 2015. Then, excessive exuberance tempted many domestic buyers into the stock market. A substantial credit expansion allowed people to buy shares on borrowed money.
It would be easy to imagine that the US/China trade war and the US Federal Reserve’s resolve to tighten monetary policy, which have been the two big fears hanging over the US stock market throughout 2018, are reaching some sort of stasis. The market certainly rejoiced when Fed chairman Jay Powell made the dovish comment that interest rates are “just below” the range of rates considered neutral. The Dow Jones Industrial Average index shot up by 600 points in one session, its best single-day gain since March.
Arguably the biggest reason for the pullback in emerging market equities is owing to the trade spat between the US and China. However, we think that the market reaction has been excessive.
While it’s certainly hard to predict how things could play out, in light of the recent G20 meeting and talks between US President Donald Trump and his Chinese counterpart Xi Jinping, there seems to be a sense that there could be further negotiations and a more conciliatory tone going forward.
Over steak, crispy chocolate and a 2014 Nicolás Catena Zapata Malbec, President Donald Trump and his Chinese counterpart Xi Jinping agreed to stand down from their impending trade war and direct their officials to focus on resolving bilateral trade problems.
Emerging markets have continued to struggle in the second half of 2018 amid an environment of heightened global equity-market volatility and geopolitical and policy risks.
However, Chetan Sehgal, lead portfolio manager of Templeton Emerging Markets Investment Trust, believes that the pullback presents long-term investors with opportunities amid what he believes is a market overreaction.
Despite the predictions of a synchronised global upswing in 2018, so-called “growth markets” have provided investors with anything but this year. The MSCI Emerging Markets index peaked in January, but has since continued to edge downwards. It reached its lowest point at the end of October, a decline of around 27% from its yearly high.
China’s Singles’ Day (11 November) underscores the huge potential of the Asian growth story. Adopted and popularised by Alibaba (the Chinese Amazon), it is now a day when everyone, regardless of whether they are single, buys themselves gifts. This one day dwarfs its US equivalents, seeing $25.4 billion in the value of purchases last year.
Investing in emerging markets is often considered to be risky. This perception may apply particularly to China, which many people consider to be a volatile and unfamiliar investment environment.
However, most of China’s investment markets have been closed to foreign investors until recently, and some of the beneficial aspects of including China in your global allocation may not be well known.
The big news this month has been the climb in US 10-year Treasury bond yields to 3.2%, their highest level since July 2011. Bond yields had been rising gently (and their prices falling), reflecting confidence that the US economy was robust enough to weather trade wars and other setbacks. However, the rise has spooked markets, forcing a reassessment of risk-free assets compared with equities.