Look for the underdog

In our latest Quarterly, our stance on both developed and emerging equity markets was neutral. Investors were playing a pinball game, bouncing off President Trump’s tweets and the occasional news on monetary policy. At that time, we didn’t know whether we were going to have a China-US trade deal anytime soon and earnings momentum across all the major equity markets had meaningfully weakened.

What has changed over the last three months, that tilts the needle toward more bullishness and makes us feel more sanguine about ex-US equities? Well, we have more clarity now. Global macro is proving to be more resilient than we expected, with some signs of bottoming out. More importantly for equity markets, the deterioration in earnings momentum seems to have halted.

Last but not least, the pivotal trade deal between China and the US is moving in the right direction. The two countries have just signed their Phase I agreement. The agreement is far from comprehensive and has kept in place most of the tariffs that were imposed thus far. That said, it offers hope that further escalation in the tariff war is now off the table.

Reflecting all of the above, our portfolio management teams have become more optimistic on their respective equity markets and have upgraded the conclusions of their five-factor frameworks from neutral to positive. This is the time to rerate the underdogs, as long as fundamentals continue to improve, starting with emerging markets.