In this week’s Market Pulse, Senior Research Analyst Jude O’Reilly talks through market movements last week, the latest macro data releases and why we expect this phase of the economic cycle to better suit emerging markets.
- A relatively quiet week with the equity market under a bit of pressure most of the week until a late rally on Friday turned it into an up week overall.
- Quarter end fund rebalancing was in focus. As the equity market has outperformed the bond market by so much in quarter the ratio of equities to bonds within these funds would have fallen out of line and thus equities would need to be sold and bonds bought. Typically a lot of these funds target a 60-40 split equity to bonds. There were mixed reports on the quantum of this in the equity market with reports of up to US$150bn dollars to be sold. There were other reports that a lot of this was executed during the week last week and this would possibly explain the positive reversal in the markets on Friday.
- Emerging markets have tended to outperform in cyclical recoveries. We expect this phase of the economic cycle to better suit emerging markets – unlike the last cycle, which was characterised by a decelerating China and low nominal growth rates. International tensions that rose during the Trump presidency are likely to moderate under President Biden. Relative valuations seem reasonable – emerging markets are cheaper than developed and their long term average. Earnings momentum is improving. The pull-back from recent highs provides a potentially attractive entry point.