Emerging Markets

MacroQuant sees the risks to US growth as being to the downside and the risks to inflation as being to the upside. Such a stagflationary brew justifies an underweight on stocks.

MacroQuant sees the risks to US growth as being to the downside and the risks to inflation as being to the upside. Such a stagflationary brew justifies an underweight on stocks.

The European economies are facing a major deflationary shock. We recommend that investors stay long a basket of Central European (CE3) domestic bonds. They should also upgrade CE3 bonds and stocks in their respective EM portfolios.

Upgrade the odds of a full-scale war in the Taiwan Strait from 5% to 10%. Rapid escalation of US-China economic war raises the probability of tensions spilling into the military-strategic domain. Investors should buy insurance against this tail risk while it is cheap. Meanwhile, use this year’s trade shock and equity volatility to increase allocation to EM manufacturing states.

Even after policymakers retract their prejudicial actions, financial markets might continue selling off. We compare the current tariff shock with two past episodes when policy reversals did not produce market turnarounds: (1) the RMB devaluation in August 2015, and (2) the US Congress's initial rejection of the TARP bank bailout program in 2008. In addition, we show numerous technical indicators illustrating at which levels the potential bottom in various equity markets could be.