RISE OF THE UNDERDOG John Leiper – Chief Investment Officer – 11th December 2020 In its latest economic outlook, the OECD increased its expectations for global GDP. For 2020, the improvement is minimal, reflecting an upward revision, in real GDP, from -4.5% to -4.2%. But beyond that, growing economic momentum should boost global growth to pre-pandemic levels, estimated at 4.2% in 2021 and 3.7% in 2022. That’s clearly good news, but risks remain, and importantly, the recovery will be far from even. China, the world’s second largest economy, has proven particularly resilient to the virus. The country started recovering far earlier than its peers and as such is the only major economy expected to record economic growth in 2020. Going forward, China is expected to account for over one-third of global growth in 2021, estimated at 8%. In contrast, the US and euro area are forecast to contract -3.7% and -7.5% this year, before growing 3.2% and 3.6% in 2021. That is a far smaller contribution relative to their respective weights in the global economy. Not surprisingly, investors are becoming increasingly bullish about the prospects for EM. The most recent Bank of America global fund manager survey highlighted an ‘unambiguous rotation to EM’ with the ‘largest proportion ever saying EM currencies are undervalued’. Within emerging markets, the current ‘winners’ include China, Taiwan and Korea. Collectively, these countries make up approximately two-thirds of the EM Asia index and as shown in the chart below, in white, this index has outperformed the broader emerging market index by approximately 10% this year. However, past returns are not indicative of future performance, and what I find particularly interesting about this chart is the clear inverse relationship between EM Asia and EM Ex Asia, in red, which tends to move in cycles and does so with remarkable symmetry over time. If historical correlations hold true, then we could expect EM Ex Asia to rebound and outperform going forward. This shift in relative fortunes is predicated on the normalisation of economic activity going forward, assuming no issues arise in the ongoing development and deployment of a vaccine. Key drivers also include the continuation of ultra-accommodative monetary policy, easing financial conditions (primarily via US dollar weakness) and further fiscal stimulus support packages. The MSCI EM Ex Asia index is skewed towards cyclical sectors of the economy such as financials, materials and energy. As such this theme is consistent with our outlook for a continuation of the rotation from growth to value. Regionally, the index is comprised of several countries including Brazil, South Africa, Russia, Saudi Arabia and Mexico, amongst others. We’ve run a number of simulations and our preferred way to play this theme is via unhedged equity exposure to Russia and Brazil. Using historic ‘bottoms’ in relative valuations, shown by the blue arrows above, we found that Russian equities delivered strong subsequent returns. The last two such occasions saw Russian equities outperform the broader EM equity index by 34% and 38% respectively, capturing the majority of potential gains as defined by its multi-year upward channel. Following a particularly weak 2020, Russian equities are now back above support and we see long-term potential upside of 55%. Key drivers include valuations (Russian stocks are extremely cheap), deteriorating political risk (recent gains imply investor confidence in the region has offset the renewed risk of sanctions following Biden’s recent victory) and a rebound in oil prices (energy has lagged the broader commodity rally thus far but we expect catch-up gains in 2021 which should benefit energy producing countries like Russia). We also like Brazilian equities which tend to perform well against a backdrop of recovering global GDP, low interest rates and a weakening US dollar. As shown in the chart below, the index has delivered average relative outperformance of 40% during the last 5 cycles, once again indicated by the blue arrows. Brazilian equities have massively underperformed so far this year, suffering large outflows from foreign institutional investors as the region became a pandemic hotspot. Positive vaccine news flow, coinciding with the start of summer across the southern hemisphere should reduce covid related risks going forward whilst resilient demand from China for commodities, such as iron ore, will benefit the materials and energy intensive equity market, via companies like Vale, which makes up 15% of the iShares MSCI Brazil ETF. Brazil also has one of the steepest yield curves around. This is positive for financials, on a relative basis, which represents the largest sector within the ETF. Despite recent gains the Brazilian real continues to lag EM peers and we see scope for further catch-up gains given forecast structural US dollar weakness. That said, the lacklustre currency also reflects growing concern over Brazil’s fiscal situation, with one of the highest debt to GDP ratios of any emerging market, 6% of which needs to be rolled over by April 2021. One of the key risks for next year is if we see Jair Bolsonaro, president of Brazil, ramp up spending into the 2022 election, without implementing necessary fiscal reforms, hitting investor sentiment in the process. Nonetheless, we believe the broader rotation to EM value should outweigh these concerns. This is the start of a new cycle and Brazilian equities could offer considerable upside potential from here. From a market timing perspective, the 10-day moving average has just crossed the 120-day indicating a potential buying opportunity. Download the PDF This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated. WANT TO KNOW MORE ABOUT THE EQUITY MARKETS? Please contact us here: 13 + 9 = Submit HAVE NEWS UPDATES SENT DIRECT TO YOUR INBOX SUBMIT RECENT BLOGS Q4 QUARTERLY PERSPECTIVES by Tavistock Investments | Nov 16, 2021 Since the 30th of June 2020, which is the date we use for monitoring performance since the start of our strategic review process, the ACUMEN Portfolios have delivered strong risk-adjusted returns, largely outperforming their respective IA sectors. read more NOTHING IS MORE POWERFUL THAN AN IDEA WHOSE TIME HAS COME by John Leiper | Nov 16, 2020 On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results. The story behind the breakthrough, which you can read here, is fascinating, not least because the husband and wife team behind the virus don’t yet know why it works. read more Q4-2020 QUARTERLY PERSPECTIVES by John Leiper | Oct 16, 2020 Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication. read more THE CALL-UP by John Leiper | Sep 29, 2020 Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission. read more ROOM TO RUN by John Leiper | Aug 24, 2020 Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index. read more THIS TIME IT’S DIFFERENT by John Leiper | Jul 25, 2020 There are growing signs that the US dollar may finally roll over. read more PIVOT TO ESG by John Leiper | Jun 26, 2020 The recovery in US equity prices, from the corona crisis, has been one of the most rapid in history. read more THE POWELL PIVOT 2.0 by John Leiper | May 29, 2020 In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion. read more FROM LIQUIDITY TO SOLVENCY by John Leiper | Apr 30, 2020 In the early stages of the Corona Crisis of 2020, the global economy faced a liquidity crisis. read more ONE CURRENCY TO RULE THEM ALL by John Leiper | Apr 20, 2020 As the world’s reserve currency, the US dollar is the go-to currency. It is used to price assets, complete transactions and as a store of value. read more MARKET NOTES 23RD MARCH 2020 by Tavistock Investments | Mar 23, 2020 In the past three weeks, global equity markets have fallen almost as much as in the Financial Crisis of 2007-08. read more Q3 2021 QUARTERLY PERSPECTIVES by Tavistock Investments | Aug 21, 2021 Over the last year the investment team have delivered strong risk-adjusted returns during a period of considerable uncertainty and market volatility. read more ANATOMY OF AN ELECTION (SO FAR…) by John Leiper | Nov 9, 2020 The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly. Anticipation for a huge fiscal stimulus package, estimated at $3 trillion+, lent itself to the global reflation trade which would stimulate the economy and revive inflation, benefiting cyclical assets whilst hitting government bonds. read more FURTHER FOR LONGER by John Leiper | Oct 12, 2020 On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little. read more TECHNICAL PERSPECTIVES by John Leiper | Sep 14, 2020 In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher. read more RISING PHOENIX by John Leiper | Aug 17, 2020 In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation. read more Q3 2020 QUARTERLY PERSPECTIVES by John Leiper | Jul 18, 2020 Welcome to the Q3-2020 ‘Quarterly Perspectives’ publication. read more THE CHINESE TECH STRUCTURAL GROWTH STORY by John Leiper | Jun 24, 2020 China’s economy has transitioned, from an industrial export-led model, towards services. read more DON’T FIGHT THE FED by John Leiper | May 26, 2020 Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy. read more SUPER CONTANGO by John Leiper | Apr 27, 2020 In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63. read more PROACTIVE INVESTOR INTERVIEW – 8 APRIL 2020 by TIG Marketing | Apr 8, 2020 Brian Raven tells Proactive Investor its two protected UCITS trusts have proved themselves during the current market volatility caused by the coronavirus pandemic. read more FUND VETERAN TAKES MAJOR STAKE IN CONSOLIDATOR IN UK WEALTH PLAN by Tavistock Investments | Mar 20, 2020 Investment sector veteran Hugh Simon has taken a near 5% stake in wealth consolidator Tavistock in a strategic partnership. read more Q2 2021 QUARTERLY PERSPECTIVES by Tavistock Investments | May 4, 2021 Welcome to the Q2-2021 ‘Quarterly Perspectives’ publication read more SINCE THE MARKET LOW by John Leiper | Nov 2, 2020 The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board. read more LIFE IMITATING ART by John Leiper | Oct 6, 2020 Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey). read more THE NASDAQ WHALE by John Leiper | Sep 7, 2020 The ACUMEN Portfolios continue to perform well. As you can see from the table below, performance for the rolling quarter (to the end of August) remains strong relative to the market composite benchmark and the current assigned IA sector, which I understand many advisers use for comparison purposes. ACUMEN Portfolios 3-8 were all in the first quartile and ranked in the top 15 within their category. read more A CURRENCY FOR ALL SEASONS by John Leiper | Aug 9, 2020 Having identified, and benefited from, the 7% fall in the value of the US dollar index since late April, we have now turned tactically cautious. read more COMMODITIES MOVE HIGHER by John Leiper | Jul 12, 2020 The 10 year US Treasury yield has remained remarkably steady over the last few months, particularly as inflation expectations have gradually risen. read more THE COMMODITY CARVE-OUT by John Leiper | Jun 12, 2020 Commodities are nothing if not cyclical. They rise and fall in value with remarkable consistency over time. read more THE LIQUIDITY CRISIS IS DEAD. ALL HAIL THE SOLVENCY CRISIS. by John Leiper | May 16, 2020 In response to the corona crisis, global central banks have unleashed a tidal wave of liquidity. read more FT ADVISER – 16 APRIL 2020 by TIG Marketing | Apr 20, 2020 In a trading update last week, the listed adviser warned that the outbreak has caused commercials conditions to become “extremely challenging” read more THE BEGINNING OF THE END? by John Leiper | Apr 3, 2020 The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt. read more MARKET COMMENTARY – MARCH 2020 by Tavistock Investments | Mar 13, 2020 In the past week, global equity markets have fallen again and yields on developed market government bonds have collapsed even further. read more LET THE GOOD TIMES ROLL by John Leiper | Dec 2, 2020 Markets are ebullient, and they have every reason to be. read more CANARY IN THE VOL-MINE by John Leiper | Oct 26, 2020 With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. Meanwhile a long/short basket of companies more closely aligned with Republican policy and values has steadily underperform. read more LET’S GET CYCLICAL, CYCLICAL by John Leiper | Sep 30, 2020 The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17. read more A SPEECH FOR THE HISTORY BOOKS by John Leiper | Sep 1, 2020 In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’. This means the Fed will now allow inflation to overshoot its official 2% target to compensate for prior years where inflation failed to reach that level. read more ALL THAT GLITTERS… by John Leiper | Aug 3, 2020 In last week’s blog, This Time It’s Different (24 July 2020), I suggested the US dollar was on the cusp of crashing through its decade-long uptrend. read more THE BIGGER THEY ARE, THE HARDER THEY FALL by John Leiper | Jul 3, 2020 Those stocks that outperformed during the corona crisis are the same ‘winners’ that outperformed before the crisis. read more THE RETURN OF INFLATION by John Leiper | Jun 7, 2020 Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress. read more ECONOMY ≠ MARKETS by John Leiper | May 10, 2020 One question I get from advisers and clients, more than any other, is why global equity markets have bounced back so far. read more FT ADVISER – 16 APRIL 2020 by TIG Marketing | Apr 20, 2020 Bosses at Tavistock Investments have taken a voluntary, significant pay cut… read more RETURN-OF-CAPITAL IS AS IMPORTANT AS THE RETURN-ON-CAPITAL by John Leiper | Mar 27, 2020 Last week, we considered the debt story behind the coronavirus. The fear of a large debt overhang, as the economy slows, led to concern that households and companies could start to default on their... read more HALCYON DAYS by Tavistock Investments | Mar 9, 2020 Halcyon days, global equity markets have fallen again and yields on developed market government bonds have collapsed even further. read more GlossaryPrivacy PolicyCookie PolicyTerms and Conditions Copyright Tavistock Investments Plc | Managed and Hosted by Tavistock Investments Plc We use cookies This website is for information only. Click "I Accept" below to acknowledge acceptance of our Cookie policy. If you do not wish to accept, please leave the site. The button will re-appear for confirmation that you agree, if at first you reject. Cookies will not load if you reject, which may affect the delivery of certain functions of the website. Cookie settingsI acceptReject