WEBVTT

00:00:16.049 --> 00:00:19.052
On a year to year performance basis,
the Emerging Markets

00:00:19.052 --> 00:00:22.555
Index has soundly beat the S&P 500 index,

00:00:22.856 --> 00:00:26.292
notching a 7.5% gain against the U.S.

00:00:26.693 --> 00:00:29.796
large cap benchmarks, a 1% increase,

00:00:29.796 --> 00:00:32.799
according to Bloomberg data
at the time of this writing.

00:00:33.366 --> 00:00:36.870
This has garnered much attention
from the financial press,

00:00:37.070 --> 00:00:42.175
as some pundits continue to speculate
that the era of American exceptionalism

00:00:42.442 --> 00:00:47.080
has possibly come to an end,
even while a number of E.M.

00:00:47.147 --> 00:00:50.917
economists are sputtering
and possibly would not fare

00:00:50.917 --> 00:00:53.887
well in a drawn out global trade war.

00:00:54.454 --> 00:00:57.657
Some investors are adjusting
portfolio allocations

00:00:57.690 --> 00:01:01.694
to feature more EM exposure and less U.S..

00:01:02.495 --> 00:01:05.832
But is this the right move
now for long term investors

00:01:05.832 --> 00:01:08.968
who are trying to build wealth
in stocks over time?

00:01:09.769 --> 00:01:11.471
In short, we don't think so.

00:01:12.939 --> 00:01:14.240
A quick glance

00:01:14.240 --> 00:01:19.279
of the emerging market
index performance over the past 20 years

00:01:19.579 --> 00:01:22.515
shows the index meaningfully below

00:01:22.515 --> 00:01:25.852
the level seen in late October 2007,

00:01:26.486 --> 00:01:29.489
just before the start of the Great
Financial Crisis.

00:01:30.523 --> 00:01:32.459
Over the same time frame,

00:01:32.459 --> 00:01:35.462
the S&P 500 is up nearly 400%,

00:01:36.830 --> 00:01:41.301
while countries like China are trying
to turn their economies more towards

00:01:41.301 --> 00:01:44.604
domestic consumer consumption and reduce

00:01:44.604 --> 00:01:47.607
their reliance on exports for growth.

00:01:47.674 --> 00:01:50.677
The fact remains they are still dependent

00:01:50.677 --> 00:01:54.047
on the developed world, especially U.S.

00:01:54.047 --> 00:01:57.050
consumers buying all their stuff.

00:01:57.550 --> 00:02:00.553
We believe global trade
volume in the near-term

00:02:01.121 --> 00:02:05.125
are likely to remain
subdued as developed economies slow.

00:02:06.226 --> 00:02:08.128
That will weigh on the emerging market

00:02:08.128 --> 00:02:09.229
earnings.

00:02:09.229 --> 00:02:11.798
Much of the outperformance
in the emerging markets

00:02:11.798 --> 00:02:15.135
this year can be traced
to a combination of factors.

00:02:16.302 --> 00:02:18.705
First, coming into this year,

00:02:18.705 --> 00:02:23.543
US equities, as gauged by the S&P
500, are not cheap.

00:02:24.544 --> 00:02:26.579
Investors were more

00:02:26.579 --> 00:02:28.882
counting on robust performance

00:02:28.882 --> 00:02:31.518
from not only the large cap tech

00:02:31.518 --> 00:02:34.120
and tech like individual companies,

00:02:34.120 --> 00:02:38.525
which have been a big influence
on the index in the past couple of years,

00:02:39.759 --> 00:02:44.230
but also the view that earnings
and individual equity performance

00:02:44.597 --> 00:02:47.300
within the S&P 500 would show

00:02:47.300 --> 00:02:50.303
more of a broadening trend

00:02:50.770 --> 00:02:52.105
more sectors.

00:02:52.105 --> 00:02:55.508
Industry groups and individual stocks
making up the S&P

00:02:55.508 --> 00:03:00.246
500 are participating in the rally
may be a positive sign,

00:03:00.246 --> 00:03:06.152
in our view, but uncertainties over
tariffs and related growth and inflation

00:03:06.152 --> 00:03:09.189
concerns weighed on the S&P performance

00:03:09.489 --> 00:03:12.492
in the first three months of this year.

00:03:12.792 --> 00:03:16.696
Other factors at play
have included consensus

00:03:16.996 --> 00:03:21.401
EM earnings estimates for coming quarters
appearing to bottom out,

00:03:21.901 --> 00:03:24.437
and a number of EM economic data

00:03:24.437 --> 00:03:27.607
reports came in
modestly better than expected.

00:03:28.841 --> 00:03:29.976
We may see

00:03:29.976 --> 00:03:33.179
emerging market, economic and earnings
expectations

00:03:33.479 --> 00:03:36.482
that are not likely to pan out
in the coming quarters.

00:03:37.050 --> 00:03:41.054
For investors that are carrying
emerging market equity exposure

00:03:41.487 --> 00:03:44.490
above the recommended portfolio
weightings,

00:03:44.891 --> 00:03:47.894
we suggest trimming from that position

00:03:48.561 --> 00:03:51.831
and reallocating towards the favored U.S.

00:03:51.831 --> 00:03:54.400
large cap equities and U.S.

00:03:54.400 --> 00:03:56.603
mid-cap equities.

00:03:56.603 --> 00:03:59.606
We think the rally in emerging markets

00:03:59.772 --> 00:04:02.775
is well ahead of the economic
fundamentals.

00:04:03.743 --> 00:04:06.980
As a result, we are not chasing the E.M.

00:04:06.980 --> 00:04:09.983
outperformance
we have seen so far this year.

00:04:11.050 --> 00:04:13.987
We remain underweight.

00:04:13.987 --> 00:04:16.823
In summary, emerging markets

00:04:16.823 --> 00:04:20.827
earnings estimates for the coming quarters
are appearing to bottom out.

00:04:21.494 --> 00:04:26.165
Some economic data came in
modestly better than expected.

00:04:26.799 --> 00:04:29.802
We believe the Rally in Emerging Markets
Index

00:04:30.036 --> 00:04:33.039
is well ahead of the economic
fundamentals.

00:04:33.339 --> 00:04:35.508
We are not chasing the E.M.

00:04:35.508 --> 00:04:36.442
outperformance.