In the latest Fundamental Equities Outlook from Robeco, Fabiana Fedeli - Global Head of Fundamental Equities and Portfolio Manager in the Emerging Markets Equities team - observes that we have entered risk-off territory with all the obvious characteristics: developed markets are outperforming emerging markets and the US reigns supreme. Needless to say, in equity markets quality is outperforming value.
“Let’s not forget that a Fed tightening cycle has not per se been negative for equity markets, as long as it responds to improvements in the global economy (think 2004-06). However, a steeper tightening path to stem inflationary pressures that are not accompanied by an improved growth outlook, is likely to have a negative impact. So the key issue becomes that, if the current trade disputes erupt into a full-fledged trade war, we are left with inflation-led tightening in the US at the same time as the global growth cycle taking a turn for the worst.
“The outcome will be, as it often is, binary. The trade war either happens or it doesn’t. With current sentiment, positive news on the trade disputes could ignite a rally. How long that will take, and the volatility that we will have to endure in the meanwhile, will have to be weighed against our risk budgets. Reflecting all of the above, none of the fundamental factors in our five-factor framework have changed for either our Developed Markets or our Emerging Markets teams. Both frameworks continue to score positively on macro and earnings. Yet, our Developed Markets team has become less upbeat. In their view, unless we get positive news on the trade disputes, volatility is likely to stay high, as the market is discounting increasing risks of escalation at the same time as we expect declining Central Bank support.
“Similarly, our Emerging Markets portfolio managers see macro and earnings unchanged. They have downgraded the sentiment factor to neutral as we have seen outflows since May and emerging bond spreads have been widening. They have also downgraded the technical factor to neutral, and believe that most global investors will now take a wait-and-see approach to see what happens on the trade side and on emerging currency volatility.”