David Dali, Head of Portfolio Strategy, provides his 12-month outlook for global equity markets.
Outperformance Beckons in an Easing Environment
Persistent tightening of U.S. and European monetary policy is contrasting with early-stage loosening in emerging markets (EM). This easing, combined with positive policy actions in China, has strengthened my conviction that Asian and EM equity allocations may outperform in the coming quarters.
- Emerging markets (EM) have been held back as China’s weak post-COVID recovery has weighed on sentiment. I expect this to change, however, as China begins to make policy moves to address its economic challenges. In addition, returns from EM excluding China have kept up with developed international markets this year and going forward, their diverse characteristics could buffer their economies against constrained liquidity conditions in developed markets.
- Regionally, I’ve upgraded my view of Latin America from underweight to neutral as tight monetary policy has helped strengthen currencies and created room for policy easing.
- I’m more positive about Asia ex Japan where I remain overweight. China’s challenges are fading and recovering domestic demand should support imports from Korea, Taiwan and the Association of Southeast Asian Nations (ASEAN) countries, helping offset a policy-induced slowing in the global economy.
- Among single countries, China remains overweight as the government has finally begun to make policy moves to address the current crisis of confidence. Recent policy announcements include support of platform companies (which should have a positive impact on employment, especially for college graduates), more tax incentives and easing household credit, property developer loan relief, and relaxing of overseas borrowing restrictions to stabilize the Chinese currency. Lastly, although geopolitical tensions will remain, recent visits to China by Antony Blinken, Janet Yellen and John Kerry show a willingness from both sides to engage.
- In India, economic growth remains solid and early tightening of monetary policy has tempered inflation to create an almost Goldilocks scenario. While India seems poised to perform well against regional peers I’m keeping my neutral view. Inflationary risks remain which could force the central bank into another round of rate increases not priced into already elevated valuations.