Emerging Markets – Harlyn Research LLP

New EM Equity Model

Friday, March 15th, 2024

More visibility and better risk-adjusted returns

Our new EM equity model replaces the global country model and is designed to give us greater visibility on this asset class. We show that our normal process outperforms the benchmark in absolute and risk-adjusted terms. The average annual outperformance since inception is 2.9% and this is achieved despite the model’s volatility being lower than the index. It has outperformed the index in 20 out of 28 years and has good persistence of recommendation. The average stay in the top and bottom five (out of 25 countries) is about 18 weeks. India is the top-ranking country at the moment and close to maximum overweight, while China is at the bottom and close to maximum underweight.

Filed under: Categories: China, Emerging Markets, Equities, Harlyn's Process, India

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Country Trumps Sector

Thursday, January 18th, 2024

Switching between equity regions will be a theme in 2024

Our models do not currently identify much opportunity for generating outperformance by switching between asset classes and most of our equity sector models are reducing their recommended active weight. We still think that above average exposure to cash and short-dated bonds is a good idea. However, they may be some opportunities for switching between equity regions, which will be affected by changing perceptions of political risk as we move through the year. The important thing is to stay nimble and remember that other people have opinions too. One example of this is in EM Equities, where India vs China is now priced for perfection, which doesn’t reflect the fact that India has a general election in April or May.

Filed under: Categories: Cash, Correlation, Diversification, Emerging Markets, Equities, Geo-Political Risk

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A Label Without Meaning

Friday, July 21st, 2023

EM Equities have too much complexity and not enough return

All EM equity indices comprise a mix of countries which once shared some important economic characteristics, but no longer do. The whole asset class is dominated by China, where the investment outlook is increasingly uncertain. Looking at over 20 different countries with vastly different growth profiles and levels of income no longer makes sense. Investors who wish to reduce the complexity of their portfolios should think about swapping their EM equity allocation for one to India on its own. It has outperformed its benchmark by a substantial margin over the last 5,10, and 20 years and will probably continue to do so given its superior demographic profile and productivity outlook.

Filed under: Categories: China, Emerging Markets, India, Real Economy

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What To Do About China

Saturday, May 6th, 2023

It’s an ill wind which blows nobody any good.

EM Equities are in deep trouble and we see no early turning-point, mainly because China is also suffering. The strong outperformance promised after the end of lockdown has not materialised, but more importantly, our models suggest that the local equity market itself is not functioning as it should. Two relatively obscure indicators: active weight and persistence of winning and losing sectors are either at, or very close to, 20-year lows. This suggests that investors are struggling to construct portfolios, which deliver an appropriate balance between risk and return. This is not a problem China has suffered from until recently and if it continues, international investors may have to regard this as a secular trend, not a cyclical aberration. If EM and China are not attractive destinations for international capital, other regions must benefit on a relative basis – and the most obvious is Europe.

Filed under: Categories: China, Emerging Markets, Global Equities, Rotation

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Three Things That Didn’t Happen

Friday, March 24th, 2023

No dollar surge, no switch to defensives or into EM Equities

We have written before about the importance of dogs which don’t bark in the night. Three things did not happen last week. The dollar did not surge in response to stress in financial markets. Equity investors did not dump cyclical or high-beta sectors in favour of defensive sectors. There was no shift towards EM Equities in response to a banking crisis in developed markets. Simple explanations are often wrong, but maybe investors think that the dollar is structurally over-valued, that there isn’t going to be a recession in the US or Europe and that the great globalisation trade of the last 30 years is over. They could be wrong, but their opinions are important.

Filed under: Categories: Defensives, Dollar index, Emerging Markets, Market dislocation

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The Unreal, Real Yield

Friday, September 16th, 2022

Inflation expectations in the US are still too low.

There is a big mismatch in US inflation expectations, with 10-year breakeven rates anchored around 2 percent, survey data at 5 percent and core CPI at over 6 percent. We think the latter figures are far more realistic, which means that the US fixed income and equity markets could be in for a nasty shock. We also think that global currency markets are becoming disorderly and that the yen, euro and sterling will all test historic lows against the dollar. It’s not a “sell-everything” strategy, but it is closely related. There may soon be an interesting opportunity in EM Equities and EM Bonds. The last bull market in EM Equities started about three months before the dollar index hit its last high in late 2001 and we see other historical parallels which spark our attention,

Filed under: Categories: Dollar index, Emerging Markets, Inflation, Interest Rates, Real Yield

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Pivot to Asia

Friday, July 22nd, 2022

It may be the least-worst option

There is a leadership vacuum in global equity markets. The US, the Eurozone and the UK all have serious issues to confront, ranging from valuation excess and monetary tightening to political uncertainty and energy rationing. Japan and Emerging Asia share some of these problems but are not as badly affected. One is a low return, risk reduction trade, while the other offers high risk and high reward. Both strategies have a place in a well-diversified global equity portfolio.

Filed under: Categories: Diversification, Emerging Markets, Equities, Japan

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Discontinuity Rules

Friday, March 18th, 2022

A lot has changed but not everything that should have

If the fall of the Berlin Wall was supposed to be the end of history, the invasion of Ukraine may well mark the rebirth of geography in investment markets. Equity returns in Europe are being impacted by country specific factors beyond the usual mix of sector effects. We see the potential for new definitions of core and periphery in Eurozone bond markets and there are many emerging equity markets in Latin America and SE Asia which are not affected by the war, even the asset class as a whole is (China, Russia, Eastern Europe). The thing which hasn’t changed is the momentum of US earnings growth.

Filed under: Categories: Emerging Markets, Eurozone Crisis, Geo-Political Risk

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Time for Some Bottom-Fishing

Friday, November 26th, 2021

Chinese Technology could lead a rally in EM Equities

We spend a lot of our time dissuading clients from going bottom-fishing, mainly because it doesn’t work very well. But there are times when we may need to do it to protect ourselves from the risk of being underweight a sector or country which rallies very fast. This week we highlight a combination of charts (EM Equities and China vs the World and Chinese Technology vs China) which have all sent recent signals suggesting that we may need to close our underweight positions in a hurry. There is a risk/opportunity that Chinese Technology could lead sharp and unexpected rally in EM Equities.

Filed under: Categories: China, Emerging Markets, Market Timing, Technology

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China vs US Exceptionalism

Friday, August 27th, 2021

Exposure to some sectors may be justified but timing is critical

Our recommended exposure to Chinese equities is effectively zero, but EM Equities (of which China is by far the largest part) are critical to the success of any global balanced portfolio. So, we have looked at individual Chinese sectors to see which ones have been the most successful diversifiers compared to their US counterpart. The good news is that it is easy to identify those which fail the test badly: Financials, Industrials, Telecom and Small Caps. The bad news is that only Technology has offered successful diversification over the whole of our test period, but now is not a good entry point. There may also be opportunities in Consumer Staples and Healthcare, but, again, we prefer to wait for a better entry point.

Filed under: Categories: China, Diversification, Emerging Markets, Equities, Seasonality, United States

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