"The world's largest wealth manager just turned bearish on stocks" was the title of a Bloomberg story that hit the wires early this morning. Expanding on the story, the writer goes on to explain how this European firm is incorporating a "new underweight to emerging market stocks" which "are more exposed to heightened market volatility, a slowing global economy, and heightened trade tensions."
We found the story interesting considering the fact that global growth first began to slow roughly 18 months ago and emerging market stocks have dropped 13% from the interim high for global stocks in late January 2018. Furthermore, emerging market stocks are lower by over 11% since the unofficial start of the Trade War in March 2018. They are also down 7% since the all-time high in U.S. large cap stocks last month. According to Bloomberg, fund flows have been negative for 13 consecutive weeks. As this wealth manager's clients likely continue to sell their emerging markets stocks, we wonder where they are going with the capital. Global real estate markets are richly priced, as are bond markets and cash returns are punitively low across Europe. What good is closing the barn door - in this case de-risking portfolios - after the horse has gone?
We don't disagree that emerging market stocks generally are riskier than developed market assets and if the world enters a severe recession we would expect them to decline in the short term; however, as the chart below shows, they remain far more attractively priced than U.S. stocks which means they will probably deliver better long-term returns. While emerging markets have trailed their U.S. peers dramatically for most of the last several years, recent performance has been more closely in line, which may suggest a shift in market leadership.
The chart below can be downloaded here.
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