Newspaper article The Journal (Newcastle, England)

Sharp Divergence of Developing and Emerging Indices

Newspaper article The Journal (Newcastle, England)

Sharp Divergence of Developing and Emerging Indices

Article excerpt


MAY proved to be another decent month for equity markets with all major markets participating in the rally. Over the last three months the MSCI World index has gained more than 20%, but the interesting point to note is the sharp divergence between the developed and emerging market indices.

Emerging markets have gained 40% over the last three months, led by Asia.

We remain impressed that the equity market has shown such resilience following such a sharp recovery.

That said, the economic backdrop has undeniably improved. Last week saw the usual start-of-month release of the purchasing managers' manufacturing indices (and the sister Institute of Supply Management indices in the US). The news here was universally positive, with upside surprises seen in most regions. Jobs data in the US also provided a shot in the arm for risk appetite, again suggesting that the worst may now be behind us. In terms of the global economy, our current thinking is that while we are still in a deep recession, the signs are that it is bottoming out.

As we expected, the US is leading the major economies, but China and its Asian trading partners are doing better still.

Regionally, our overweight position in Asia excluding Japan has paid off handsomely over the current quarter. While this has started to put some pressure on valuations, the superior economic outlook for the region over the short to medium-term leads us to conclude that the outperformance can continue for a while yet.

In terms of overall equity positioning, we still believe it is appropriate to remain cautious and add risk to portfolios in a selective manner, particularly as there are still some headwinds that could blow the recovery off course. The second-quarter earnings season is now less than a month away, and initial estimates suggest that this will be a fairly ugly affair. …

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