Asset Allocation / Emerging Markets

Last week BCA Research (renowned, independent research from Canada) published the October Bank Credit Analyst. Their core statements are:

•  Despite the headwinds posed by the fading of the inventory cycle and fiscal stimulus, the U.S. will avoid a double-dip recession.

• The anticipation of a new round of quantitative easing has pushed down real interest rates. However, evidence of a “bond bubble” is lacking.

•  A widening of spreads among peripheral economies in Europe at a time when risk assets have rallied is troubling, but ultimately Europe will avoid a fiscal crisis.

• Equities should be able to grind higher despite a sluggish growth outlook on the back of extremely accommodative monetary policy and reasonably firm profit margins.

•  While EM equities should continue to outperform thanks to continued capital inflows, on a valuation basis, emerging market equities are no longer cheap relative to developed markets.

The chart demonstrates the outperformance of emerging markets for the past 2 years:

A recent investor’s survey by Morgan Stanley confirms the preference for emerging markets:

 

Momentum investors will try to profit from the current movement while value investors will underweight emerging market stocks.