Financial Markets

A global portfolio is likely to return only 5.3% a year over the next decade, compared to 6.7% in the past. Investors either need to lower their return expectations, or take more risk. Our total return methodology remains consistent with previous editions, with changes limited to the Alternatives section.

Today’s Strategy Report chartbook presents the data underpinning our view that both inflation and growth are slowing, likely pointing to a recession beginning sometime in the first half of next year. We are tactically equal weight across asset classes after being stopped out of our equity overweight on August 17th and expect our next move will be to underweight equities and overweight fixed income, in line with our twelve-month view.

In part 2 of this series, we discuss mainstream EM equity valuations and present the results of our cross-country analysis. The goal is to identify overweights and underweights within an EM equity portfolio.

Deflation prevails in China’s economy. Marginal interest rate cuts will be insufficient to boost growth as the economy is experiencing debt deflation and might be entering a liquidity trap. There will likely be more economic disappointments in the coming months. Chinese stocks will continue to sell off. Government bond yields will fall to new lows, and the RMB will depreciate further against the US dollar.

The next six-to-nine months hold a crucial test of whether the equity market will ratify the soft landing and the Biden administration or not. If so, then markets will rally on policy continuity and likely gridlock. If not, then markets will struggle until the election is over and again in 2025-26.

While the bearish bond trade currently has a lot of momentum, we continue to think that Treasury yields are close to a cyclical peak and will be lower on a 6-12 month horizon.