The Weekly Strategy Report (March 19, 2018)
- Emerging markets are caught in a tug of war between escalating trade tensions and healthy global growth. Although reflation has been a persistent market theme since the U.S. election, in recent weeks investors are focusing on the politics of trade.
- We caution against reacting too negatively to protectionist talk (and tweets) from the White House. Rhetoric is not reality, supply chains are integrated, trade is mutually beneficial and U.S. tariffs could be defeated by international legal challenges.
- Above-trend global growth, stable commodities and strengthening currencies are supportive of both emerging market (EM) equity and debt. Valuations do not appear stretched in either asset class. Further, most emerging economies with external financing concerns have seen their large current account deficits close.
- We retain conviction in our base case of steady global growth and maintain an overweight in both EM equity and debt.
EXHIBIT 1: CURRENT ACCOUNT DEFICITS ARE MUCH IMPROVED, PARTICULARLY IN BRAZIL AND SOUTH AFRICA
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