Quarterly Update

Jan. 2020

City National Rochdale, | Jan. 2020

Emerging Markets Equity Outlook

We are optimistic on 2020 EM equities’ performance

Amid global slowdown, EM Asia would stand out with its bottoming out of growth slowdown and with its still relatively attractive absolute levels of growth

A cautious fundamental research-driven bottom-up approach remains key for investment in EM equities

by Anindya Chatterjee, Senior Vice President, Lead Portfolio Manager — Fiera Capital

We are optimistic on 2020 EM equities’ performance as we expect economic cycles in the key EM Asian economies to bottom out. The consensus on U.S. equities is for continued but more moderate gains in 2020, and we anticipate that this will keep risk appetites of investors elevated. At this point, the relatively attractive EM growth outlook should draw fresh attention. The overall valuation premium of U.S. Equities over EM Equities widened through the past decade and remains stubbornly high. We do not see any long-term structural change/damage in EM to warrant a permanent valuation discount in EM over U.S. equities<.b>. A normalization of the U.S.-EM equity premium seems overdue. Growth, demographic dividends, and continued reforms amid the ever-present multi-faceted uncertainties remain the hallmark of EM attraction and characteristics.

China’s slowdown has been significant throughout the last decade, but the deceleration in growth gathered pace through 2018-19. However, several indicators, including China’s industrial production, retail sales and fixed asset investments, hint at a possibility of a bottoming out of China’s economy. On the other hand, the slowdown in India’s economy from 1Q2018’s 8% YoY to the current growth rate of 4.5% is even more dramatic. The Indian economy is in the grip of a credit squeeze, with a meltdown in asset quality of lenders. It may take a few more quarters before bottoming out. However, the significant corporate tax cuts kick in from 2020, the continued GST Reforms and its adaptation by the broader economy, and the government’s renewed infrastructure push should be overall positive for Indian equities ahead.

The recession scares, predicted by a yield curve inversion in the summer of 2019, have eased with subsequent yield curve steepening. The U.S. economy is clearly slowing but is still expected to post moderate growth in 2020. Likewise, earnings growth should be more moderate, with the corporate tax cuts in the rearview mirror. The market is likely to see some renewed volatility in 2020 as uncertainty about the economic backdrop lingers. Disappointment in the pace of progress in U.S.-China trade deal negotiations beyond Phase I may impact business and consumer sentiment.

Geopolitical risks remain active with a defiant Iran and North Korea, and tensions in Hong Kong persist. The last quarter of 2019 also saw a firming up of crude oil prices. That is particularly a concern for crude-importing EM Asia. Nonetheless, given overall global growth prospects, EM Asia would stand out with its bottoming out of growth slowdown and with its still relatively attractive absolute levels of growth.

We stay focused on long-term investment themes and fine-tune our sector and country allocations based on our fundamental outlook. In 2020, we renew our focus on domestic demand themes in EM Asia. The U.S. economy is slowing, and we anticipate that as investors seek resilient growth, the domestic demand-focused sectors (particularly in EM Asia) will stand out. There are several uncertainties that continue to weigh against risk assets, and a cautious fundamental research-driven bottom-up approach remains key for investment in EM equities, in our view.   

Key Points

We are optimistic on 2020 EM equities’ performance

Amid global slowdown, EM Asia would stand out with its bottoming out of growth slowdown and with its still relatively attractive absolute levels of growth

A cautious fundamental research-driven bottom-up approach remains key for investment in EM equities

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

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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 on the date of this document and are subject to change.

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All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. 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.

The Standard & Poor’s Small Cap 600 Index (S&P 600) measures the small-cap segment of the U.S. equity market. The index is designed to track companies that meet specific inclusion criteria to ensure that they are liquid and financially viable.

The Shanghai Stock Exchange (SSE) composite is a market composite made up of all the A shares and B shares that trade on the Shanghai Stock Exchange.

The Dow Jones Select Dividend Index seeks to represent the top 100 U.S. stocks by dividend yield. The index is derived from the Dow Jones U.S. Index and generally consists of 100 dividend-paying stocks that have five-year non-negative Dividend Growth, five-year Dividend Payout Ratio of 60% or less, and three-month average daily trading volume of at least 200,000 shares.

Nasdaq 100 Index is an index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange.

MSCI Emerging Markets Asia Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the Asian emerging markets.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. As of June 2007, the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe. As of September 2002, the MSCI Europe Index consisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

The S&P U.S. Treasury Bond Current 10-Year Index is a one-security index comprising the most recently issued 10-year U.S. Treasury note or bond.

S&P Leveraged Loan Indexes (S&P LL indexes) are capitalization-weighted syndicated loan indexes based upon market weightings, spreads, and interest payments. The S&P/LSTA Leveraged Loan 100 Index (LL100) dates back to 2002 and is a daily tradable index for the U.S. market that seeks to mirror the market-weighted performance of the largest institutional leveraged loans, as determined by criteria. Its ticker on Bloomberg is SPBDLLB.

The Barclays High Yield Municipal Index covers the high yield portion of the U.S.-dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

The Bloomberg Barclays U.S. Corporate High Yield Index is an unmanaged, U.S.-dollar-denominated, nonconvertible, non-investment-grade debt index. The index consists of domestic and corporate bonds rated Ba and below with a minimum outstanding amount of $150 million.

The Barclays Aggregate Bond Index is composed of U.S. government, mortgage-backed, asset-backed, and corporate fixed income securities with maturities of one year or more.

The Corporate Emerging Market Bond Index (CEMBI) is J.P. Morgan’s index of U.S.-dollar-denominated debt issued by emerging market corporations.

Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. This grade is described as light because of its relatively low density, and sweet because of its sulfur content.

The Bloomberg Commodity Total Return Index, formerly known as Dow Jones-UBS Commodity Index Total Return (DJUBSTR), is composed of futures contracts and reflects the returns on a fully collateralized investment in the BCOM. This combines the returns of the BCOM with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury Bills.

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