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.

Will calm return to markets?

Key message: The VIX index rose as high as 50.3 on 6 February. This extreme level was only previously seen during the depths of the global financial crisis and briefly touched during the 2015 market correction. The move, which was exacerbated by a rush to cover short-volatility positions, fueled the largest daily sell-off in the S&P 500 since 2011. But we don't believe the surge in market volatility reflects a fundamental problem for equities.

Did you know?

The maximum intra-year drawdown in 2017 was -2.6%, and the VIX level averaged only 11.1, making it the calmest year on record.

Following past spikes on volatility (when the VIX index traded above its 90th percentile), the S&P 500 has posted 12-month gains 87% of the time, with a median return of 22%.

Should rising bond yields spook equities?

Key message: Inflation concerns helped drive the recent equity correction, but even though higher-than-expected inflation has continued to push bond yields up further, for now, equities have regained their poise. We believe that the bulk of the rise in yields may be in place and equity investors are focusing on fiscal stimulus and strong earnings growth. But with markets switching focus back and forth between inflation and reflation, the ride is likely to be bumpy.

Did you know?

In just the first eight trading sessions of 2018, the pool of bonds with sub-zero yields shrank by about USD 1 trillion to USD 7.3 trillion, the smallest since July, according to Bloomberg.

Since 8 September, the 10-year US Treasury yield has climbed 83bps, reaching levels not seen since early 2014.


Is the end of easing a cause for concern?

Key message: The era of emergency easy money looks to be coming to a gradual close, with the Federal Reserve and the European Central Bank (ECB) both carrying out their tapering programs. Smaller central banks around the world are eyeing policy normalization, too. But we believe this doesn't mean central banks are withdrawing the punch bowl on concerns over inflation. Rather, by historical standards, central banks remain accommodative, and cautious tightening reflects improving economic health.

Did you know?

The end of monetary easing is often referred to as central banks taking away the "punch bowl," a metaphor coined by former Fed Chair William McChesney Martin:

Fed rate rises are not necessarily damaging to stocks. On average, since 1971, stocks have risen 11.2% in the 12 months following a rate increase.

Pivot to planning

Is the S&P safer than cash?

What does a weaker dollar mean for markets?

Key message: The US Dollar Index dropped 9.9% in 2017, and its momentum has continued into this year. Current account dynamics, the Eurozone's preparations for the end of QE, and the USD's overvaluation on a PPP basis help explain the drop. As the world's most important currency, there are implications for markets globally. The dollar weakness could result in greater policy caution for the European Central Bank (ECB) and the Bank of Japan (BoJ), boost US companies' overseas earnings, support emerging market (EM) equities, as well as lift commodity prices. Continued US dollar pressure should support a number of positions in our tactical asset allocation.

Did you know?

We estimate that USD weakness so far this year should increase US corporate earnings by about 1%. This is quite small compared with the boost we anticipate from tax reform.

While the USD is weakening, but is not yet undervalued. We estimate fair value for EURUSD, for example, as 1.28 on a purchasing power parity basis.

Can emerging markets power ahead in 2018?

Key message: Market volatility in the US spilled over to global assets in recent weeks, with emerging market (EM) equities reversing their record-setting January return of 8.4%. But many of the supportive factors behind EM equity performance last year remain intact, including strong global growth, a revival in EM earnings, and only gradual monetary tightening, offering reason for continued investor optimism. Against this favorable backdrop, we recommend an overweight to EM equities.

Did you know?

China, the largest emerging economy, expanded by 6.9% last year, its first acceleration in seven years.

EM equities (ex. Chinese 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.

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