by Ryan Lewenza, North American Equity Strategy, TD Wealth
With the global equity markets under pressure, and concerns mounting over the emerging markets (EM), we wanted to provide a market update to address some of these issues. Overall, we believe the current EM concerns will subside and that the U.S. economy could improve over the Spring/Summer timeframe providing the foundation for equity markets to climb higher in H2/14. Highlights of today’s report include:
· Global equity markets have started the year on a negative note, with the S&P 500 Index (S&P 500), MSCI Europe Australasia Far East (EAFE), and MSCI Emerging Markets (EM) indices down 3.6%, 4.1%, and 6.4%, respectively, during the month of January. The weakness across the global equity markets can largely be attributed to: 1) softer economic data which points to weakening global economic momentum; and 2) the U.S. Federal Reserve’s (Fed) move to reduce its asset purchases by an additional US$10 billion per month.
· The recent stock market rout was triggered by the January HSBC Flash China Purchasing Managers’ Index (PMI) which showed a contraction in the Chinese manufacturing sector. That coincided with the high for the S&P 500, with the index declining 20 points the following trading day.
· With the Fed cutting back on its asset purchases, the unprecedented liquidity that flowed into risky assets, such as the EMs, is now being withdrawn, resulting in steep declines of some EM currencies. The question then is whether the instability in the EMs will escalate and lead to a global contagion, similar to the 1997 Asian currency crisis. We believe this scenario is unlikely, and that as the markets acclimate to reduced Fed liquidity, the EMs will begin to stabilize.
· The U.S. economy has lost some momentum following a strong H2/13. However, we believe U.S. economic data could trough soon, possibly over the Spring/Summer.
· The upside of the recent equity market weakness is that equity valuations and investor sentiment have corrected from their elevated levels in Q4/13.
NA Equity Strategy (Market Update) - February 6, 2014
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