On the Radar

City National Rochdale, | Jul. 7, 2020

FAQs on the Markets and Economy

What is the outlook for EM Asia equities?

We believe both the near term and long term outlook for EM Asia equities continues to be attractive.

In the near term, Asian economies are expected to be among the first to recover globally from the COVID-19 crisis, amid billions of dollars in stimulus and relatively effective virus containment.

Bright spots have already emerged, such as improving Chinese data for consumer demand and industrial output, as well as sizeable rebounds in June PMIs across the region.

At the same time, most of Asia’s emerging markets are better equipped to manage any potential resurgences in the virus, given a strong testing and contact tracing infrastructure in place.

Persistent low interest rates in the U.S. are also a positive, helping take pressure off EM central bankers, strengthening Asian currencies and reducing costs on emerging market companies with dollar-denominated debt.

For long term investors, our proprietary 4Ps Framework analysis continues to indicate the investment opportunity is compelling. The region’s growth outlook remains resilient, supported by robust demographic and urbanization trends and high investment rates. EM Asia also boasts a superior earnings growth profile, particularly vs. other non-US developed markets, and remains attractive relative to other geographies.

The reopening of the economy happened sooner than the Fed expected.

The data shows an upturn in spending (see spending question) and a significant increase in hiring. In the past two months, nonfarm payrolls have increased by 7.5 million (see labor question).

The increase in economic activity is very welcome news.

But at the same time, the lifting of the lockdowns carries some risks. This can be seen in recent increases in coronavirus infections and hospitalizations.

Powell warns that the path of economic growth is dependent upon successful containment/control of the coronavirus.

Following weeks of being confined at home and pent up demand for many goods and services, shoppers went out and “shopped ‘til they dropped.”

Consumer spending rose a record 8.1% in May. The previous monthly record increase was just 1.3% in 1999. This would be very impressive if it were not for the significant declines in spending over the previous two months (-12.2% in April and -6.4% in March). Personal consumption expenditures (which measures spending on goods and services) is down 11.7% since the February peak.

Personal income fell 4.2% on the month, but that follows on the heels of a 10.8% increase in the previous month. In the past couple of months, the federal government has made significant payments to households (e.g., $1,200 stimulus checks and enhanced unemployment insurance), which has boosted income.

Despite the increased spending and reduction in income, the savings rate remains elevated at 23.2%, down from April’s record 32.2% (chart). We believe households are stretching the aid money until they are sure they have jobs to return to. Although payrolls have jumped 7.5 million in the in the past two months, it is still 14.7 million below the February level.

The labor market has improved substantially in the past two months. June nonfarm payroll surged a record 4.8 million. Add that to the May gain, and 7.5 million people have returned to work. The unemployment rate fell to 11.1% from 13.3% in May, and both are below the April high of 14.7%.

This good news sets the stage for economic improvement. But to put some context around these numbers, even with back-to-back record increases in nonfarm payrolls, it stands 14.7 million below the February record high of 152.5 million (chart). The unemployment rate is still at elevated levels. It was above the previous record high of 10.7% in 1982. It was just 3.5% in February.

The data reinforces the belief that the economy is still fundamentally strong and should facilitate a robust recovery. The trajectory of the recovery could be highly dependent upon the pace of getting the pandemic under control.

After the best quarter for U.S. stocks since 1998, equity valuations by some measures are now at the highest levels in two decades, and a recovery in earnings will likely be key for markets to take the next step higher.

The Q2 earnings seasons begins in the next few weeks, which should mark the worst of the entire pandemic cycle. Companies will be reporting on results for the April through June period, when much of the economy was shut down.

As of now, S&P 500 earnings are estimated to have declined -43.9% over the quarter, which would be the largest year-over-year decline since Q4 2008 (-69.1%). However, with so much uncertainty surrounding the impact of the virus, reported results are likely to take a backseat to company guidance as investors try to get a handle on how businesses are functioning and what growth potential there is in the back half of the year and into 2021.

Investors have been increasingly optimistic and forward looking since the March lows, eyeing a recovery in corporate profits beginning in the third quarter. In fact, after hitting its lowest level in 18 years, sentiment has shown a significant change in tone recently with analysts raising their EPS forecasts for the second, third and fourth quarters.

We believe valuations can remain elevated going forward given the unprecedented amount of stimulus, record-low interest rates, lack of inflation and lack of attractive alternatives to equities. Nevertheless, earnings expectations will likely take over as the primary driver of market returns in the months ahead.

Overall, CNR expects S&P 500 earnings to decline by about 27% in 2020 before growing 30% in 2021.

Stay Informed.

Get our Insight delivered straight to your inbox.

Important Disclosures

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These include, but are not limited to, stock market, manager, or investment style risks. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, and economic and political instability.

Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems, than developed markets.

There are inherent risks with fixed income investing. These may include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond risks. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.

Investments in below-investment-grade debt securities, which are usually called “high-yield” or “junk” bonds, are typically in weaker financial health, and such securities can be harder to value and sell and their prices can be more volatile than more highly rated securities. While these securities generally have higher rates of interest, they also involve greater risk of default than do securities of a higher-quality rating.

The yields and market values of municipal securities may be more affected by changes in tax rates and policies than similar income-bearing taxable securities. Certain investors’ incomes may be subject to the federal Alternative Minimum Tax (AMT), and taxable gains are also possible.

Investments in the municipal securities of a particular state or territory may be subject to the risk that changes in the economic conditions of that state or territory will negatively impact performance. These events may include severe financial difficulties and continued budget deficits, economic or political policy changes, tax base erosion, state constitutional limits on tax increases, and changes in the credit ratings.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.

Returns include the reinvestment of interest and dividends.

Investing involves risk, including the loss of principal.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.

Past performance is no guarantee of future performance.

Index Definitions

The Standard & Poor’s 500 Index (S&P 500) is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.