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A more cautious stance on equities

A more cautious stance on equities

07-10-2021 | Quarterly outlook
As the end of the year approaches, investors are entering a traditionally auspicious season for equities. This time, though, we believe there is reason to be more cautious. For now, this does mainly have an impact on our near-term outlook for emerging markets.
  • Arnout  van Rijn
    Arnout
    van Rijn
    CIO Asia Pacific
  • Wim-Hein  Pals
    Wim-Hein
    Pals
    Head of Emerging Markets team
  • Michiel  Plakman
    Michiel
    Plakman
    Portfolio Manager
  • Audrey Kaplan
    Audrey
    Kaplan
    Portfolio Manager

Speed read

  • We keep a positive stance on DM, downgrade outlook for EM
  • Fed tapering and less buoyant earnings likely to weigh on sentiment
  • Ongoing debate regarding inflation needs to be closely monitored

Indeed, emerging markets have historically been more sensitive to tighter US monetary policy, and the US Federal Reserve (Fed) has expressed its intention to start tapering its USD 120 billion monthly purchases from November this year, probably by USD 15 billion a month. This means that, although markets remain firmly supported through the generous provision of liquidity, it is inevitable that the huge pool of policy support will shrink.

Also, we believe that the other engine that has driven stocks to all-time highs – namely, earnings – may well sputter in the fourth quarter. Input price pressure is hitting both industrial and consumer companies’ profit margins. This is illustrated by the gap between producer price indices (PPIs), which reflect input prices, and consumer price indices (CPIs), which reflect output prices.

Meanwhile, the strong upward revisions to earnings forecasts seen over the past year seem bound to gradually fade. The upward momentum in earnings-outlook revisions has continued to be strong across the world, with only two downgrades for every three upgrades. We haven’t seen such numbers since 2004. However, our view is that this trend is unlikely to be sustained, as we see slower economic growth and margin pressure ahead.

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