Investment Clock insights

Cooling nominal growth has been negative for emerging markets


Hiroki Hashimoto

10 September 2018

Our latest update of the Investment Clock suggests that it has stayed in mild Stagflation territory (the red dot in chart 1) but moved toward Reflation with nominal growth continuing to cool off. Chart 2 shows the long-term relationship between emerging market (EM) stocks against bonds and the RLAM nominal growth scorecard. This relationship captures the recent underperformance of EM stocks which coincided with our nominal growth scorecard deteriorating.
Losses in global economic momentum, continued trade tensions and country specific issues meant it was a soggy summer for EM. We went into the summer by trimming our overweight position in equities to the lowest levels since 2012, with a core regional allocation of overweight US and underweight EM. Such a combination has been beneficial for our multi asset funds over the summer months.
With no central banks in a major rush to tighten monetary policy, momentum in global nominal growth could improve over the next few months. Further shift towards Reflation may force central banks, especially the Peoples Bank of China to shift towards easier monetary policy path which could also boost nominal growth. This would be supportive for stocks including EM. The question then becomes when to buy back EM.
We’re likely to maintain our regional tilts for now as we wouldn’t be surprised to see bouts of volatility over the next few months, especially with ongoing US/China trade tensions. However, if we get a stock market sell-off around trade fears, we would expect defensive equity regions to outperform higher risk EM and we would likely use such a dip as an opportunity to add to stocks, possibly focusing our buying in EM.

Our latest update of the Investment Clock suggests that it has stayed in mild Stagflation territory (the red dot in chart 1) but moved toward Reflation with nominal growth continuing to cool off. Chart 2 shows the long-term relationship between emerging market (EM) stocks against bonds and the RLAM nominal growth scorecard. This relationship captures the recent underperformance of EM stocks which coincided with our nominal growth scorecard deteriorating.

Losses in global economic momentum, continued trade tensions and country specific issues meant it was a soggy summer for EM. We went into the summer by trimming our overweight position in equities to the lowest levels since 2012, with a core regional allocation of overweight US and underweight EM. Such a combination has been beneficial for our multi asset funds over the summer months.

With no central banks in a major rush to tighten monetary policy, momentum in global nominal growth could improve over the next few months. Further shift towards Reflation may force central banks, especially the Peoples Bank of China to shift towards easier monetary policy path which could also boost nominal growth. This would be supportive for stocks including EM. The question then becomes when to buy back EM.

We’re likely to maintain our regional tilts for now as we wouldn’t be surprised to see bouts of volatility over the next few months, especially with ongoing US/China trade tensions. However, if we get a stock market sell-off around trade fears, we would expect defensive equity regions to outperform higher risk EM and we would likely use such a dip as an opportunity to add to stocks, possibly focusing our buying in EM.

Chart 1: RLAM Investment Clock

Source: RLAM. For illustrative purposes only.

Chart 2: EM Stocks vs Bonds and Nominal Growth Scorecard

Source: Thomson Reuters Datastream as at 07/09/2018.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.