Questions we're tracking

Each month we will answer five of the top questions on investors' minds and on our minds as we determine our House View positioning.

Are you prepared for the return of volatility?

A semblance of calm has returned to markets. The VIX index of implied volatility moved back below its 200-day moving average, and markets remained calm in reaction to President Trump's decision to exit the Iran nuclear deal. Even so, we don't expect a return to the ultra-low volatility that prevailed last year. A wide range of risks – from a global trade war to rising US inflation – is likely to ensure choppier markets, but investors should not retreat to cash. Instead we recommend staying invested while managing risks.

Did you know?

Global equities haven't seen a bear market for a decade, but all but two of the world's 10 largest equity markets (the US and South Korea) have experienced a drawdown of more than 20% at some point in the last five years.

Are US yields at 3% a cause for concern?

The 10-year US Treasury yield recently traded above the 3% psychological threshold. Rising yields could add to concerns about future economic growth and the relative attractiveness of stocks, but so far their impact on businesses and households has been muted, and equities still look attractive relative to bonds.

Did you know?

Even though yields have been rising across the spectrum, the yield curve has also been flattening – the spread between the yields on 2-year and 10-year Treasuries has narrowed from 265bps at the end of 2013 to 45bps.

Part of the flattening is due to a larger issuance of short-term US Treasuries, while the strength of institutional bond demand is holding down long-term rates.

What does Trump's Iran pact exit mean for oil?

President Trump’s Iran pact withdrawal has complicated oil’s price outlook, with unresolved questions on actual volume disruption and major buyers' reactions. Risks now appear skewed to the upside, and we lift our six- and 12-month forecasts to USD 80 and USD 75 per barrel, respectively. While non-OPEC supply growth has exceeded our expectations, we believe renewed Iran restrictions may result in a slight oil deficit this year of 0.2–0.4mbpd.

Did you know?

Iran had returned to form as a major oil exporter after sanctions were lifted in 2015 in exchange of freezing its nuclear program, with exports averaging 2–2.5 mbpd in recent months.

The resumption of US sanctions could reduce Iranian oil exports by 250,000–500,000 barrels a day, according to consultant FGE.

Will the threat of a trade war derail markets?

The Trump administration has followed tariffs on steel and aluminum imports with trade action against China, which announced retaliatory tariffs of its own. Beijing and Washington officials have traded jabs even as they expressed openness to negotiations. While US actions have reawakened fears of a global trade war, we believe the US and China will reach a resolution before their tariffs go into effect in several months' time. While we are watchful for signs of escalation, our base case is that simmering trade frictions won't boil over into a full trade war.

Did you know?

Over 70% of the MSCI China Index is composed of financials, technology (mainly
internet), and consumer discretionary stocks, whose earnings are largely driven by domestic demand, not exports.

Among Chinese listed companies, international sales make up a low-teens percentage of their total sales, and of this the US accounts for close to 20%. This implies that their direct exposure to the US is around 3% of total sales.

Can emerging markets power ahead in 2018?

Emerging markets are under pressure. The JPM EM Currency Index is down nearly 8% since mid-February, with the Turkish lira and Argentine peso hitting fresh lows. EM equities have also fallen nearly 10% from their all-time high in January. But the long-term outlook for emerging markets remains positive. We expect GDP growth to rise from 5.2% in 2017 to 5.4% in 2018, and inflation remains relatively subdued, meaning that growth-harming rate rises can be avoided in many cases. Profit growth remains solid, with MSCI EM earnings per share set to rise 8–12% this year, and valuations look attractive versus developed markets. But as long as a rising USD and US yields persist, emerging markets may face headwinds in the short term.

Did you know?

EM equities (excluding China A-shares) have attracted inflows of more than USD 26bn since the start of the year, according to Morgan Stanley. Recent volatility has seen this slow, but not reverse.

China's economy expanded by 6.9% last year, its first growth pick-up in seven years.

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