Probability-based investment modelling for professional and institutional investors
Europe, apart from the UK, is producing better risk-adjusted returns than most emerging markets. These have been flattered by favourable FX movements, but there are good fundamental reasons for this as well. Unless the euro gets too strong, we don’t see why investors would want to change a winning formula, anytime soon.
With every passing week Eurozone and UK equities become a little bit more attractive and Japanese equities little less so. The headlines scream political risk in Europe, but that is a reason to sell government bonds in the affected countries, not international companies, which happen to be quoted there. By contrast, Japan has a bucket load of political risk in the form of President Trump and the dollar-yen exchange rate.
Last week we focussed on the prospects for CNY USD exchange rate in the wake of Mr Trump’s election. This week we add falling EM equities, unstable asset allocation models and rising political risk in the Eurozone to the list of issues which confront international investors. We also note that Japan is hardly affected by any of them.
Now that the US elections are over, markets will begin to refocus on the big issues facing the global economy, one of which is the CNY USD exchange rate. We think that the behaviour of the Chinese Industrials sector may offer valuable insight into what Chinese investors think about this.
Buying Eurozone equities on the basis of currency weakness is a tried and trusted tactic, which is suddenly in vogue as the euro approaches a 13-year low against the dollar. Enjoy it while it lasts, because US equities will struggle if dollar strength prompts a wave of downgrades for 2017 earnings.