By Guild Investment Management via Iris.xyz

Executive Summary

1. We are bullish on emerging markets, which are looking up. We wrote last week that we saw the stars aligning for 2019 to be the year that emerging markets finally wake up from their slumber. This week, we discuss the signs we see a little further. Foreign investor sentiment on emerging markets is rebounding, with flows into emerging-market ETFs growing year-to-date and in the past 12 months. The Chinese government is continuing to ease, trying to stimulate the Chinese economy in ways that will not worsen the leverage problems in its financial system; those efforts are beginning to bear fruit, both in economic data, and in sentiment among Chinese investors and small business owners. Valuations of emerging-market stocks are not stretched; presently they are just near their long-term average, and have room to expand. Most importantly, perhaps, most central banks around the world, from the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan, to the People’s Bank of China and the Reserve Bank of India, are easing in response to the global growth deceleration that occurred in 2018. If the experience of the whole post-crisis period means anything, this easing will be supportive of economic growth and investor sentiment, and of asset prices generally — especially stocks.

2. Market summary. We recognize that pullbacks can happen at any time, but we remain bullish on the U.S. and believe that despite its advance so far in 2019, the U.S. market can appreciate further — possibly much further. We continue to examine sectors and industries within the U.S., looking for opportunities that are created by the market’s overreaction to news flow, and uncertainty generated by political events and concerns. The economic stimulus being implemented by the Chinese government — though still modest by historical standards — seems to be bearing fruit, both in investor and small business owners sentiment, and in “green shoot” economic data such as retail sales and industrial output. Sentiment on domestic shares is good among Chinese investors, buoyed by government pronouncements talking up the significance of the stock market. Other emerging markets, especially the Asian manufacturing exporters in China’s near neighborhood, are also showing positive trends in economic data. Data are picking up in Europe as well; a Chinese reacceleration will also benefit European exporters, particularly Germany. Europe may present a tactical opportunity as a result, but investors should tread carefully — we are not long-term Europe bulls. A compliant U.S. dollar, sideways to lower, is one of the needed elements for a positive emerging-market thesis to play out. With the U.S. Federal Reserve firmly on hold, and a growing feeling that rates have seen their near-term peak, dollar strength may not be much of a concern. If this pattern plays out, gold could benefit modestly over the course of the year.

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