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Political risk in Europe has fallen

By Michael Bell, Vincent Juvyns, Tilmann Galler
2017 was billed as a year of potential political turmoil for the eurozone. Investors feared that elections in the Netherlands, France and Germany could lead to a victory for an anti-euro party plunging the very future of the eurozone into doubt
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Defining reflation, gauging momentum

By George Iwanicki
We believe that global reflation is predominantly a growth (rather than inflation) acceleration story. Emerging markets are broadly participating, and importantly the EM earnings cycle has finally turned positive. Risks to this view remain— China growth peaking, a possible "last phase" of USD strength, or a capping of positive earnings estimate revisions (given higher implied growth in current projections). Still, we are optimistic that the turn in momentum can drive additional performance for the asset class, particularly given that valuations are not yet at levels that challenge this improved momentum backdrop.
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The two-horse race that the polls predicted

By Vincent Juvyns, Stephanie Flanders
The 2017 French presidential election has been the most uncertain in the history of the Fifth Republic. But on this occasion, the opinion polls turned out to be right, with centrist Emmanuel Macron and Front National leader, Marine le Pen, both proceeding to the second round.
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May calls for June election

By Dr. David Stubbs
Theresa May announced her intention to call an early general election for Thursday 8 June. She made it clear that this election would be about her approach to Brexit, saying current divisions within Westminster jeopardise the UK’s negotiating position with the EU, which she wants to strengthen.
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Emerging Market Debt Q2 2017: Reflation takes root

By Pierre-Yves Bareau, Derek Traynor
Given the risks posed by protectionism, we are more cautious on open economies and those more dependent on external funding. Overall, we have shifted our focus from market beta to carry this quarter, coming off of solid first quarter performance, tighter valuations and the little market premium attached to the risks we have identified. We place an emphasis on short-end names and those idiosyncratic stories that we identify as having positive event skew.
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The European political project at a crossroads?

By Vincent Juvyns, Tilmann Galler, Maria Paola Toschi
Twenty-five years after the signing of the Maastricht treaty, the European political landscape is more fragmented and polarised than ever, in a year when key member states are facing general elections.
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New challenges for Emerging Markets: Risk or opportunity?

By George Iwanicki
The unexpected election of Donald Trump as U.S. President sparked dramatic change across the global investing landscape - and Emerging Markets were hardly immune.
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100 days of change

By Dr. David Kelly
A series of bulletins analyzing the first 100 days of the Trump Administration and how these changes may impact the investment environment.
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Entering the reflation era

By Pierre-Yves Bareau
We are entering a new investment paradigm: the era of "lower for longer" and "search for yield" has now been replaced by an era shaped by higher growth, inflation and rates.
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Eye on the Market Outlook 2017 Overview: True Believers

By Michael Cembalest
Michael Cembalest, Chairman of Market & Investment Strategy, provides an overview of key topics covered in his 2017 Eye on the Market Outlook and their potential impact on global markets.
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An analysis of productivity

By Dr. David Kelly
What it is productivity, how do you analyze it and what drives it? With slower global GDP growth pushing down expected equity and fixed income market returns, our experts discuss trends and measures that could help boost global economies.
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Rising inflation: Options to help protect your portfolio

By Dr. David Kelly
Inflation rates are set to rise across the developed world. Rising inflation raises the bar for investment managers as clients require better returns just to stand still.
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U.S. elections: A populist victory

By Dr. David Kelly
In the long-run, investors would do well to make sure that they are well diversified outside of U.S. stocks and bonds and that they have sufficient exposure to alternatives and international securities.
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Living on borrowed time: Understanding global debt and what it means for investing 

By Samantha Azzarello, Gabriela Santos, Hannah Anderson
Investors around the world are worried about elevated global debt levels. While there may be more pressing day-to-day market matters, debt remains a persistent underlying concern.
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Brexit - a shock for markets, or a crisis?

By Stephanie Flanders
Investors have been seriously wrong-footed by the result of the EU referendum. But the shock of City traders this morning is nothing compared with the stunned response of the people who thought they ran the country.
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On Brexit

By Michael Cembalest
On Brexit, the week before the vote. Michael Cembalest discusses his view that many articles overstate Brexit risks and consequences for the UK, and/or overstate the vote’s impact on political movements and economic malaise in the Eurozone that predate it by months and years. Here are some of his thoughts on issues that have been raised over the last few weeks.
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Brexit: What investors should consider

By Stephanie Flanders

Chief Market Strategist Stephanie Flanders discusses Britain's place in the EU and the pre-referendum landscape and despite of how a vote in favor of remaining in the European Union is probable, a “no” vote in the coming UK referendum is a distinct possibility and is something investors should be prepared for.

And what if Britain does votes to leave? Short-term economic and market impact and longer-term consequences are also discussed. But the transition to a new set of arrangements would be messy and potentially very costly, not just for the UK but also its closest trading partners.

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The future of monetary policy

By Stephanie Flanders, Michael Albrecht, Benjamin Mandel
  • In the aftermath of the first Federal Reserve (Fed) rate hike in nearly a decade, attention has briskly shifted to the future. What’s next for policy interest rates? How will central banks deal with their extraordinarily large balance sheets? In this paper, we take an even longer view. What does developed market monetary policy look like in future cycles, and what does it imply for markets?
  • Even as central banks experiment with mildly negative interest rates, we believe that balance sheet policies similar to quantitative easing will remain a regular feature of the landscape. Born of necessity when policy rates hit their zero lower bound, quantitative easing emerged to repair markets and ease financial conditions.
  • The process of experimentation with “unconventional” policy will continue so long as central banks face the limit of a lower bound on policy rates. One idea that has gained traction is the direct monetization of fiscal stimulus by central banks (i.e., helicopter money). Such policies need to balance the exigency of economic stimulus with the inherent risks, but it is fair to say that they are less unconventional now than they used to be.
  • More active balance sheet policy and muted variation in policy rates imply that yield curve steepening and flattening in subsequent cycles will be more moderate. The inversion of the curve that historically preceded recessions may not arise and, if it does, may not send the same signal in future cycles.
  • All of these developments are a mixed blessing for multi-asset investors. On one hand, central banks are finding ever more diverse and creative solutions to achieve their mandates. On the other, it suggests that the warning bell coming from the yield curve will be less informative than it used to be about the most worrisome of risk-off outcomes—when the economy tilts into recession. In our view, variations in quantitative easing among central banks will define the degree of monetary policy divergence in the coming years.
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Time to revisit emerging markets

By Pierre-Yves Bareau

In our base case scenario of muddle-through growth, with a gradual recovery of EM growth alpha and moderately tighter financial conditions, we prefer to base our core exposures on higher quality credit names with stronger balance sheets and fiscally prudent positions. This reflects our more cautious longer-term view, given the still- considerable downside structural risks from commodities, China and U.S. monetary policy normalisation. For the second quarter, however, the prospect of lower market volatility and a cyclical stabilisation leads us to favour tactical positions in idiosyncratic high yield stories.

From a sector perspective, we remain constructive on duration, as the challenging growth backdrop, global easing bias, currency stability and generally moderate inflation dynamics should continue to support local currency rates. While yields have rallied this past quarter, we still believe there is further room for compression.

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China at the crossroads

By Derek Traynor

China’s economic transition from investment-driven growth towards a more sustainable market-based model focused on services and consumption appears to be well underway. However, achieving a smooth transition is being made more challenging by several structural obstacles.

In this paper, Emerging Market Debt portfolio managers Ai Ling Ngiam and Derek Traynor look at some of these structural issues, focusing on how excessive levels of leverage and industrial overcapacity have the potential to derail China’s economic transition. We also examine how China’s capital account is coming under pressure as the country embarks on a programme to liberalise its exchange rate regime.

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A case for Europe

By Vincent Juvyns, Alex Dryden

Market confidence has been badly hurt in the opening weeks of the year as investors worry about the possibility of a global recession. We believe these fears are probably overdone and investors should take a step back and look at the big picture, particularly in the eurozone.

The eurozone saw moderate economic growth in 2015 of around 1.5%, and we see several reasons why this momentum should be sustained this year, including further support from the European Central Bank (ECB), more supportive fiscal policy and cheaper energy.

Some European sectors and companies will be negatively affected by weakness in global trade and the slowdown in China and other emerging markets. On balance, however, we believe that the domestic drivers for eurozone growth can offset these negatives. In this note we briefly outline those positive forces and restate the case for active investors to retain their exposure to regional risk assets.


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Back to a value market

By Pierre-Yves Bareau

We think emerging market debt will be driven more by idiosyncratic alpha than broad market beta in 2016 and, therefore, country differentiation will be crucial to seek out the best alpha opportunities:

  • We find that economic conditions are broadly supportive. Growth is finally stabilising across the emerging world after several disappointing quarters, although Chinese rebalancing may constrain Asian and commodity exporting economies in particular.
  • Emerging markets are less vulnerable to external financing pressures in the face of rising U.S interest rates, given smaller current account deficits.
  • Private sector debt has increased, largely because of China, but still remains below private sector debt in the developed markets.
  • Capital outflows intensified in the lead-up to the U.S. interest rate decision at the end of 2015, but we are hopeful that the marginal pressure on flows will fall now that the Federal Reserve has finally started on the path to normalization.
  • We continue to prefer emerging market hard currency sovereign credit given the still-favourable US dollar environment, and relatively stronger fundamental and liquidity characteristics of the sector versus emerging market corporate credit.
  • For emerging market local currency debt, corporate credit and FX we prefer to take a more selective and relative approach. While local currency valuations are attractive with yields close to 5 year highs, we prefer to take a more cautious approach given the lack of a meaningful catalyst on the FX side.
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Higher risk, higher rewards?

By George Iwanicki

What summarizes the EM struggle right now is this: increasingly cheap valuations, and the potential for higher reward, juxtaposed against what we might call the summary statistic of all the headwinds weighing on emerging markets: a de minimis growth premium relative to what we’ve seen historically vs. the developed world and unfolding risks from Fed policy and China FX intentions hence higher risk, higher (potential) reward.

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In search of a global business cycle

By Michael Hood, Benjamin Christensen

To what extent are national and regional economies engines of global growth, and what causes economies to move together? We examine the drivers of business cycle synchronization and cast today’s experience—that developed market (DM) economies appear to be out of sync with one another and with emerging market (EM) economies—in historical relief.

We find that, outside of recessions, DM divergence is a normal state of affairs. We also find that in stark contrast to growth, DM bond yields display a very high degree of co-movement. Since only part of the relationship among bond yields can be accounted for by underlying fundamentals, we ascribe an important role to financial globalization in tying markets together tighter than economies.

Relatively weak links among DM economies and between developing and emerging economies suggest that “global engine” stories should be taken with a pinch of salt. Changes in financial conditions arising from economic divergence, such as changing relative interest rates and exchange rates, appear to act as only loose constraints on economic outcomes. As a result, the effect of financial spillovers may well turn out to be more subtle than many people fear.

Meanwhile, financial synchronization indicates that DM economies import financial conditions from one another as they move through the business cycle, creating slightly looser conditions for vanguard economies and slightly tighter ones for lagging economies.

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A transition with Chinese characteristics

By Gabriela Santos
  • The Chinese economy is slowing as it makes the transition from investment-and-industry-led growth to an economy more dependent upon consumption and services. This transition is both needed and an evolving reality.
  • Although China has been engineering a smooth transition, the risks of a policy mistake have increased. The Chinese government, however, has many tools to manage this transition.
  • Internationalizing China’s financial system has important consequences for global financial markets.
  • A slower rate of growth in China is a headwind for emerging markets, but not necessarily for developed markets.
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Eye On the Market 2016 Outlook - Key Topics

By Michael Cembalest
Michael Cembalest, Chairman of Market and Investment Strategy, touches on topics including: the global banking system, oil markets, the credit risk of US states and credit market liquidity.
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Eye On the Market 2016 Outlook - Planet of the Aches

By Michael Cembalest
Michael Cembalest, Chairman of Market and Investment Strategy, discusses the aches and pains constraining growth around the world, the severity of these ailments, and the degree of contagion from emerging to developed economies.
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Investment Professionals
Dr. David Kelly
Chief Global Strategist and Head of Global Market Insights Strategy
Stephanie Flanders
Chief Market Strategist, EMEA
Michael Cembalest
Chairman of Market and Investment Strategy

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