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Source believes emerging market equities may outperform over next 12 months


The Multi-Asset Research team at ETP provider Source finds that while the recent volatility in asset markets has made many investors more cautious, the global economy continues to grow modestly and the likelihood of a rate rise by the US Federal Reserve (Fed) may not be as worrisome as many investors seem to believe.

Paul Jackson, Head of Multi-Asset Research at Source, (pictured) says: “We are not overly concerned about the Fed rate hike that we believe is still most probable by the end of the year. Indeed, our analysis shows that equity markets tend to perform well during Fed tightening cycle, especially compared to government and investment grade bonds. What would concern us more would be a dramatic slowdown in the global economy, which current data does not seem to be suggesting.”
Jackson also believes that fears over the economic slowdown taking place in China are exaggerated, with the country’s increased debt being self-financed and much of the bank lending being financed by deposits. In addition, the People’s Bank of China still has unused policy tools at its disposal, Source says.
Jackson does acknowledge, however, that Chinese economic growth is decelerating, but believes this may have more of an impact on commodities than to global equities and other risk assets.
The report points to the prospects for Eurozone and Japanese equities, given that their domestic economies are in the early expansion phase of the cycle, in contrast to the US and UK, which are both much further along. The report also concludes that, in the fixed income space, Emerging Market (EM) debt may offer the most attractive total returns for the next 12 months, although currencies may weaken further versus the US dollar. With some of the main EM countries now in recession, this should be an environment in which debt markets benefit.    

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