DM Equity Allocation Model For Q1 2019

We are pleased to introduce our new Developed Markets (DM) Equity Allocation model. Building on the success of our EM model, this new framework extends our analysis to cover 24 DM equity markets. Our analysis is meant to assist global equity investors in assessing relative sovereign risk and optimal asset allocation across countries within the DM universe.

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EM Preview for the Week Ahead

EM FX ended the week on a soft note as the dollar remains resilient. Very weak EM PMI readings so far in January are very concerning and underscore why we remain negative on EM despite the Fed capitulating to the market and tilting more dovish. Firmer currencies should allow EM central banks that meet this week to keep rates steady.

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What Has Changed in EM

  • India Prime Minister Modi is boosting fiscal stimulus ahead of general elections due by May
  • Indian officials appear to be withholding economic data that is harmful to the government
  • Pakistan central bank unexpectedly hiked rates
  • Russia central bank may be tilting dovish
  • Argentina central bank will increase its USD purchases when the peso trades below the target range
  • Fitch downgraded PEMEX two notches to BBB- with a negative outlook

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99 Problems But The Fed Ain’t One

The Fed delivered an extremely dovish hold today. In doing so, we fear that the Fed has given in too much to the market and its tantrums and recent Fed messaging leaves a lot to be desired. There are still a lot of potential risks to the market ahead. As such, we see potential for further volatility and swings in market sentiment if this current round of Fed messaging turns out to be too dovish, as we suspect. For now, however, markets have the green light to buy equities and sell the dollar.

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US Shutdown Ends (For Now), Debt Ceiling Battle Up Next

The US government has reopened after the partial shutdown that lasted 35 days. Yet the clock is running since the stopgap spending bill only funds the government through February 15. Even if a lasting deal is reached, this recent dysfunction suggests problems ahead as the debt ceiling comes back into effect March 2.

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EM Preview for the Week Ahead

EM FX ended last week on a firm note, fueled by news that the US shutdown was ending (at least temporarily). This week brings some potential for more positive headlines regarding Brexit, US-China trade talks, and Fed policy. Yet all three could pose negative risks too. We believe the US rates markets still need to normalize before the dollar can get significant traction.

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What Has Changed in EM

  • Priyanka Gandhi Vadra was appointed to a senior position by India’s opposition Congress Party
  • Thailand announced general elections will be held March 24
  • Russia central bank will resume its FX purchases
  • Argentina central bank may tweak its FX policy
  • Brazil Economy Minister Paulo Guedes laid out targets for privatizing state assets
  • Political uncertainty remains high in Venezuela

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US Shutdown Update

The debt ceiling and government shutdowns are two separate and distinct issues in the US. Yet problems dealing with the two issues are very much correlated, since the root cause is usually a dysfunctional or divided government. Here, we focus on the government shutdown. We will deal with the debt ceiling in another piece.

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EM Preview for the Week Ahead

EM FX ended the week on a soft note, as the dollar remains resilient. While a softer US interest rate outlook benefits EM, we think this is offset by the deteriorating global growth outlook. The IMF will release its updated World Economic Outlook Monday, which is likely to highlight the growing downside risks.

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