ISQ - April 2022
A: We think Asian emerging market equities continue to look attractive. With monetary policy transitioning toward tightening throughout most of the developed markets amid higher inflationary pressures, conditions could not be more different across Asia. Not only is inflation lower across most countries in Asia, but the People’s Bank of China is the only major central bank that is easing rates right now. While China’s economy suffered from a policy-driven slowdown last year, the government is now prioritising stabilising growth ahead of Xi Jinping’s leadership conference later this year. In order to rekindle growth, Chinese authorities are now pursuing more stimulative fiscal and monetary policies, which should be supportive of Chinese stocks as the economic growth outlook starts to improve.
From a valuation standpoint, Chinese equities are attractive, trading at approximately 11 times forward earnings and near a 40% discount to US stocks. While some of this discount is justified by Chinese equities’ lower relative earnings growth, the contrast in policy settings should prove to be a tailwind in 2022, and beyond, which should help narrow this gap. We are also constructive on other Asian emerging market (EM) equities, such as Taiwan, Korea and India, as we think they are poised to benefit from longer-term secular trends in technology, e-commerce and digital payments. While EM Asia’s 2021 performance was disappointing, we are more optimistic on the region as we move through 2022 for three key reasons: 1) China, the main engine of growth in the region, is returning to a pro-growth policy, 2) cheaper valuations should provide a buffer as the market transitions away from more expensive stocks, and 3) the regulatory headwinds that plagued the market in 2021 are no longer the top priority for government officials.
A: The onset of the Federal Reserve’s tightening cycle and geopolitical tensions have pushed spreads on dollar-denominated emerging markets bonds close to 400 basis points, the additional yield compensation an investor receives for owning a riskier credit, and yields to well above 5.5%. Historically, these levels have been attractive entry points for investors. Since 2010, there have only been a handful of occasions where emerging market bonds have surpassed these levels. These periods include the 2011 European debt crisis, Russia’s annexation of Crimea in 2014, China’s 2016 growth slowdown and during the 2020 Coronavirus pandemic. In the 12 months following each of these periods, dollar-denominated emerging markets bonds delivered strong, positive total returns. Given the modestly wider spreads and higher yields available in emerging markets, we believe it is an opportune time to begin selectively adding some risk.
We are also starting to warm up to local currency emerging markets debt. While developed market central banks are just starting to normalise monetary policy, the tightening cycles in emerging markets are well underway. Central bankers in Latin America and Emerging Europe were among the first to respond to the escalating inflationary pressures that emerged late last year. Significantly higher interest rates across Latin America are taking a toll on growth now that rates are well above their pre-pandemic levels in most countries across the region. In fact, two of the largest economies in Latin America, Brazil and Mexico, slipped into a technical recession, which is defined by two consecutive quarters of declining economic growth, last year. While the growth slowdown suggests we may be nearing the end of the tightening cycles in some emerging markets, we think central bankers will be reluctant to respond to growth concerns as long as inflation remains elevated. We are carefully watching how this dynamic plays out as we believe there may be attractive opportunities in select local currency markets in the months ahead.
A: There is typically a trade-off observed between investment types. Striving for strong alpha (beating the market averages) will likely come with additional risks of some sort. For decades now, added market volatility risk has been offset by the positive total return effects of falling interest rates and tightening credit spreads. Money managers and individuals alike benefited when market prices generally moved higher. It also helped managed money by diminishing timing effects on liquidations. Most bonds exhibited profits throughout their holding periods. Tightening spreads created pricing tailwinds. These tailwinds vanish when interest rates rise, and spreads widen. Total return bond strategies may be strapped with added challenges in a generally rising interest rate environment. Higher yields and spread widening can create an opportune time to increase fixed income holdings which provide principal protection and steady cash flow – regardless of market volatility or geopolitical events.
A: Investors have a natural predisposition and sensitivity to their investment portfolio holdings’ price performance. Observing a security’s negative price change can be emotional and maybe even traumatic. After all, poor price performance can be damaging to one’s financial health and place an investor in the undesirable circumstance of having to ‘make up’ a loss of principal or hard-earned income. Price declines’ unwelcome effects apply to many growth and total return strategies; however, with individual bonds, there are key differences. As interest rates rise and individual bond prices fall, there is no interruption or reduction to the bond’s cash flow and income stream. Interest rates have risen with intermittent swiftness since the start of 2022. When a portfolio displays ‘red’ figures on individual bonds, remember the primary purpose of these holdings is often principal protection and balancing a portfolio strategy. Despite the negative market price movement, this portion of the portfolio maintains cash flow, yield and principal when held to maturity, barring an unlikely default.
In addition to its already cheaper valuation, with China instituting pro-growth policies and relaxing its regulations, we are optimistic on the region for 2022. As China makes up ~40% of the MSCI Emerging Markets Index, we expect a positive performance to have a huge impact on the broader index.
Issued by Raymond James Investment Services Limited (Raymond James). The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The taxation associated with a security depends on the individual’s personal circumstances and may be subject to change.
The information contained in this document is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. You should not take, or refrain from taking, action based on its content and no part of this document should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this document have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis.
If you are unsure or need clarity upon any of the information covered in this document please contact your wealth manager.
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Black MondayOn 19 October 1987, the stock markets experienced a dramatic plunge that prompted many firms to shut down their trading desks and turn off their phones to minimize internal losses. Raymond James refused to do the same. Our desks stayed open to help meet clients’ needs, resulting in our first and only unprofitable quarter since the firm went public in 1983. |
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Who was Raymond James?The Raymond in our name is actually from Edward Raymond, owner of a 15-employee mutual fund sales group, Raymond and Associates, along Florida’s west coast. He sold his company to Bob James on 15 July 1964, on condition that the surviving firm be called Raymond, James & Associates. Three days after the sale, Ed Raymond was involved in a near-fatal automobile accident and never joined the firm. Nonetheless, even after Raymond had passed away, Bob James insisted that his name remain on the door – ahead of James’ own. That was a promise he made to Ed Raymond three days before the accident, and Bob James was a man who kept his promises. |
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Bear Market of 1974The severe bear market of 1974 threatened the existence of Raymond James, which was bleeding capital by the day. Tom James, his father and other leaders took extreme measures to keep the firm afloat, slashing costs, foregoing paychecks and even attempting to sell the firm for just enough capital to protect client assets and retain as many associates as possible. The story could have ended very differently if not for a sharp upturn and continued rebound in the stock markets late in the year. |
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Taking Raymond James PublicWhen consideration was being given to taking Raymond James public, Tom James penned a letter to shareholders (largely employees at the time). ” … the public offering should be considered as a statement of our independence. While this is a psychological rather than an economic rationale, it is nonetheless very important. We have asserted for some time that we are not interested in becoming a small part of a very large corporation. That assertion results mainly from the inclinations of management rather than the economic benefits associated with either alternative. The public stock offering affords us the opportunity to enjoy a little bit of the best of both worlds. While shareholders will be given liquidity at fair market value, we will still have the ability to control our own destiny.” After 40+ years of Tom’s leadership, upon becoming CEO, Paul Reilly was often questioned about whether the company might ultimately surrender its cherished independence and be acquired by some larger entity. His response: “Not while I’m around.” It’s a theme that continues today. |
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