Emerging Markets
Smart beta strategies can be useful in both strategic and tactical asset allocation. Combining different smart beta strategies can smooth out the cyclicality of individual strategy and provide a better return/risk profile.
Our strategic and tactical trades were up an average 24.6% in 2016Q2, led by strategic energy recommendations. Going forward, we continue to favor energy exposure over base and precious metals, ags and softs.
A number of divergences have emerged in global financial markets. These gaps are unsustainable. The recent improvement in Asian trade/manufacturing has been largely due to firming demand for electronics/semiconductors. Meanwhile, demand/output for industrial goods and basic materials - the areas leveraged to Chinese capital spending - remain weak. Fixed-income traders should bet on yield curve steepening in India: receive 1-year/pay 10-year swap rates.
There is no evidence of a sharp increase in China's state sector investment in recent months. This, together with the cautious private enterprises, explains why overall Chinese investment has remained downbeat. Public sector investment spending will likely accelerate going forward, which should continue to support business activity.
Post-Brexit uncertainty will continue for some time. But we were already cautiously positioned, and would not go any more defensive.
The Brexit vote has ended the reflation trade, but does not represent a "Lehman moment" either. Stick close to benchmark in terms of broad asset allocation, and watch European bank CDS for signs that another financial crisis is brewing.
The Russo-Chinese relationship got a diplomatic boost this week, but can China provide Russia with the capital it needs to boost productivity meaningfully?
Rising policy uncertainty is negative for global equity multiples.
If the damage of the Brexit is contained in the U.K., the direct economic impact on China should be marginal. China's relatively closed financial system makes it less exposed to global shocks than most other countries. It is too soon to expect a policy response from the Chinese authorities just yet, but Brexit has pushed China's "balancing act" needle further toward stimulus.
Global oil demand will continue to surprise to the upside over the balance of the year - growing at a rate of 1.6 MMb/d - following an unexpected surge over the first five months of 2016.