Are emerging markets turning a corner?

A tough fourth quarter led to a solid January, and valuations remain compelling

Time to read: 2 min

The fourth quarter of 2018 was negative for both emerging and developed markets. However, we saw emerging market headwinds start to ease toward the end of the year, thanks to stabilizing currencies, lower oil prices, lower inflation pressures and progress in the US-China trade conflict. In fact, EM stocks rebounded strongly in January, yet valuations have remained at a discount to developed markets. All told, we believe there are compelling opportunities to be found in emerging markets.

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Five ‘swords of Damocles’ hang over markets

Weekly Market Compass: Several critical deadlines are fast approaching

Time to read: 4 min

In Greek mythology, the “sword of Damocles” is a powerful morality tale. King Dionysius is a leader who grows weary of a young sycophant, Damocles, who is constantly extolling the benefits of being king. To teach Damocles a lesson about the pressure and insecurity that comes with leadership, Dionysius allows him to sit on the throne for a day — but over the throne, the king has suspended a large sword, hung by a single hair. Damocles quickly learned what it feels like to be a leader who exists in imminent danger and jeopardy.

I feel as though there are several different swords of Damocles hanging over markets right now, including some imminent deadlines:

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Balancing your strategic asset allocation with US REITs

A core US REIT allocation to improve long-term risk-adjusted returns

Time to read: 3 min  

The basis of asset allocation is to combine asset classes that have low performance correlations, with the goal of optimizing the risk-return profile of the overall portfolio. A traditional strategic asset mix includes allocations to both stocks and bonds — but less often do we see a targeted allocation to US real estate investment trusts (REITs) in that mix for individual investor portfolios.

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The deteriorating state of earnings in Asia

When will prices in China and Japan become attractive?

Time to read: 4 min

Slowing global trade has weighed down export-oriented markets in Asia, and the regional earnings outlook has been deteriorating rapidly. Over the past six months, earnings expectations have been revised down 4% for the MSCI All Country Asia Pacific Ex-Japan Index.1 For December, the earnings revision ratio (which compares positive versus negative revisions) fell to 0.39, the worst reading ever recorded outside of a recession.2 The downgrades were broad-based and included all Asian economies, with 13 of 16 sectors (as defined by Merrill Lynch) experiencing at least twice as many downgrades as upgrades.1 Despite this gloom and doom, some Asian companies are beginning to look attractive using our team’s Earnings, Quality and Valuation (EQV) criteria.

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Interest rate outlook: US Treasuries likely to be stuck between better-than-expected growth and a dovish Fed

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US: Neutral.

In the near term, we expect Treasury yields to be stuck between better-than-expected growth and a dovish Federal Reserve. The Fed stated it will remain patient when considering future hikes and has noted concerns about a lack of persistent inflation. Over the longer term, we expect growth and inflation data to support a hike in June. While we continue to believe peak US growth is behind us, we expect it to remain above-potential through the first half of 2019. Inflation will likely remain benign in 2019, although labor costs may continue to accelerate. This could allow the Fed to continue its gradual path of policy normalization after a March pause.

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Currency Outlook: US dollar expected to weaken as exceptionalism theme unwinds

Invesco Fixed Income shares its views on currencies around the world

Time to read: 3 min

US dollar: Underweight.

We expect the US dollar to weaken in the near term. Renewed global growth convergence will likely cause the unwinding of the US exceptionalism theme that drove the dollar higher in 2018. We are encouraged by the price action so far this year and believe it is appropriate to re-establish an underweight in the dollar in the first quarter of 2019. US growth should remain solid in 2019, but moderate toward a mid-to-low 2% level as the Fed reaches the end of its tightening cycle. In Europe and China, we expect growth to stabilize above potential in 2019, which could cause investors to shift some assets from the US to other regions, potentially weighing on the dollar. Budget and current account deficit concerns could be additional headwinds for the dollar.

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European uncertainty has lowered the price tag for quality stocks

Fourth-quarter volatility expanded the opportunity set for those looking for a deal

Time to read: 3 min

The fourth quarter of 2018 was tough on investors in European equities, and uncertainty appears to be rising as we enter 2019. But, the Invesco International and Global Growth team believes that environments like these can result in great prices for attractive businesses. In fact, we haven’t seen valuations in Europe this low since 2013. So, what is our outlook for Europe, and where are we finding opportunity?

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The Fed changes its game plan

Weekly Market Review: The Fed signals a major change in approach at its January meeting

Time to read: 5 min

The biggest American football game of the year was played last night, and for the first three quarters, it looked as if both teams forgot how to score a touchdown. But great teams find a way to win, even when their tried-and-true game plan seems to be faltering.

The Federal Reserve (Fed) has been in a similar place, sticking to its playbook of rising rates and balance sheet normalization, and causing market jitters in the process. But last week, we saw the strongest indications yet that the game plan may be changing. The Fed released its January statement and held a press conference last Thursday. The Fed made it clear that “the case for raising rates has weakened,” citing a variety of factors from a slowing global economy to policy uncertainty surrounding trade conflicts and Brexit, and relatively low inflation.

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US investment grade credit: A buy or a bubble?

The strong economy and market pressure may drive companies to pay down debt

Time to read: 4 min

Recent market stress surrounding trade policy, the US government shutdown, Brexit and recession fears has increased focus on the US investment grade credit market and its sharp rise in leverage in the post-crisis period. Invesco Fixed Income believes these concerns are best analyzed through the lens of the BBB-rated portion of the US investment grade bond market. Some investors worry that this segment is a ticking time bomb set to upend the US fixed income market. Credit spreads on BBB-rated bonds have widened 50 to 100 basis points in the past year.1 With a focus on BBBs, we tackle some important questions for investors: Is the recent sell-off in BBBs a sign of worse things to come, or has the market over-reacted? Are there stabilizing trends on the horizon?

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How defined-maturity bond funds may help with credit market headwinds

With defined-maturity ETFs, investors may be able to mitigate market noise

Time to read: 3 minutes

Credit investors faced many headwinds in 2018 as financial conditions tightened, foreign demand faded, and spreads widened. Despite tailwinds from a booming economy and strong earnings growth, most credit sectors saw negative total returns. Today, many challenges remain, and the growth tailwind may be fading. But there is a certain type of fixed income strategy that can help mitigate the effects of market noise and may help investors pinpoint more attractive opportunities — defined maturity bond funds.

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