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Weekly Investment Research Digest - 31 Aug 2013

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August 31, 2013 – Comments (0)

This edition of the Research Clippings Weekly Investment Research Digest features insights on emerging market equities, Australian equities, the challenges facing emerging markets, the implications of rising rates and inflation, and thoughts on asset allocation in these challenging times.

Are Rapidly Rising Yields A Potential U.S. Equity Roadblock?
In this short blog post BCA (Bank Credit Analyst) looks at an ominous indicator for the US stock market and explain why they are tactically cautious on the US stock markets. The key factor they are alerting to is the rapid rise in bond yields; particularly in relation to operating earnings. In the past this indicator has signalled market weakness.

Australian Equities - Depth Down Under
Andrew Sisson of Franklin Templeton discusses why investors shouldn't rule out Australian equities, and further why they shouldn't just view Australian equities as a commodity play. Sisson points out that while best days of the mining boom are probably past, the proactive approach to rebalancing the economy to boost the non-mining sector will bring opportunities. In the shorter-term the recent significant drop in the currency, interest rate cuts, and passing of the election uncertainty should be positive for Australian stocks.

Quiet August Preceding Busy September
Dexia Asset Managment explain their view on recent global macro developments and the implications for asset allocation positioning. Dexia notes the surprisingly good run of data in the US and Europe; noting their preference for European and Japanese equities. They prefer equities over bonds on improving economic momentum and anticipate the US Federal Reserve will not let rates get out of control, while also seeing bond investors increasingly anxious.

Stop Benchmarks From Biting Your Bond Portfolio 
Kathy Jones of Charles Schwab explains why investors should re-examine their bond benchmark and overall approach to bond investing as key bond benchmarks have become skewed to US government related securities. Similarly the average duration score of the indexes have crept up; meaning higher sensitivity to rising interest rates. This concentration of exposure and higher interest rate risk suggests investors should revisit their approach, perhaps considering a greater weight to corporate bonds, international bonds, and emerging market debt securities.

Is Asian Turbulence a Win for China? 
Anthony Chan of AllianceBernstein outlines why the sell-off in emerging market currencies and bonds is not the harbinger of another Asian financial crisis like the one seen in 1997. Chan notes that policy makers have a lot more options this time around, and that external indebtedness is far less. Interestingly Chan points to the developments as an opportunity for China to further build its economic and financial influence in the region and signal its strength.

Planning for Inflation: The "Real" Deal
Michael Fredericks of BlackRock discusses the inflation "facts of life" for investors and notes that while inflation expectations are presently very low, the significant monetary stimulus in the system could bring higher inflation down the track. Fredericks suggests investors should prepare their portfolios in advance for this scenario by including a range of inflation sensitive investments in a multi-asset portfolio, while retaining flexibility in approach and allocation.

Monetary Challenges for the New Governor
Chan Yee Lui of CEIC discusses the challenges facing the incoming Reserve Bank of India (RBI) Governor, Raghuram Rajan. India made headlines over the past few weeks as the Rupee sold-off while capital outflows were also significant. Alongside this is structurally high inflation. Raghuram Rajan will need to take a collaborative process between the monetary authorities and the Government to address these challenging economic conditions.

Is the Story of Emerging Markets intact?
Giordano Lombardo of Pioneer Investments discusses recent developments in the global asset classes; particularly around the prospect of rising interest rates. While on emerging markets he sees bonds unattractive due to a low credit risk premium, he sees EM equities offering selective value opportunities. On the prospect of rising rates, their work shows historical tightening tends to be more reflective of inflation, and has not necessarily been negative for equities.

Have Emerging Markets Gotten Oversold?
Mark Mobius of Franklin Templeton Investments discusses the underperformance of emerging markets relative to developed markets over the past year. He talks about the reasons why this short-term under-performance has occurred, and highlights the still solid long-term fundamentals; concluding that while there are risks, the combination of strong growth and cheap valuations make a strong case for emerging markets.

The Purgatory of Low Returns
James Montier of GMO discusses asset allocation in the current environment of low yields and relatively high valuations across the asset classes. He notes investing in bonds is likely to lead to mediocre returns at best, and that owning bonds is akin to betting on deflation. He discusses the options for asset allocating in this environment, and concludes that patience (and cash) might be the best option.

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