Topic Tags: International Economy

2023 Investment Symposium

Watch the flash talks from Marquette’s 2023 Investment Symposium livestream on September 15 in the player below — use the upper-right list icon to access a specific presentation.

 

Please feel free to reach out to any of the presenters should you have any questions.

Brazil Eases Into the Fall

On August 2, Brazil’s central bank cut its benchmark interest rate by 50 basis points, from 13.75% to 13.25%. This marks the country’s first rate cut in over three years and is in stark contrast to moves made by Brazilian policymakers in recent time. To that point, between February 2021 and July 2022, Brazil increased its key rate from 2.00% to 13.75%, representing the most aggressive monetary tightening by any central bank during this period. The August cut was made possible by a moderate domestic inflation rate of 3.2%, which sits well below the country’s post-pandemic peak of 12.1% exhibited in April of last year. Brazilian authorities have indicated that additional cuts are likely in the near future, thanks in large part to an improving consumer price outlook and longer-term inflation expectations that continue to fall. These dynamics place the country ahead of much of the globe when it comes to the cycle of interest rates, as many nations, particularly those in the developed world, continue to fight elevated inflation via restrictive monetary policy. Alternatively, other Latin American countries like Chile, Mexico, and Peru have either lowered rates in recent time or are expected to embark on easing campaigns within the coming months.

As it relates to performance, Brazilian equities have been a bright spot within the emerging markets space in 2023 and have significantly outpaced the MSCI EM index on a year-to-date basis through the end of July (22.6% vs. 11.4%). Expectations of a shift in monetary policy which has now come to fruition, coupled with better-than-expected fiscal and political outlooks, have boosted sentiment and helped fuel these strong returns. Should monetary conditions continue to ease, Brazil and its Latin American peers may continue to provide an attractive opportunity set for investors going forward.

Observations from Across the Pond

Marquette regularly sends a senior member of our research team abroad as part of ongoing manager sourcing and due diligence efforts. These trips include update meetings with investment managers with whom Marquette has existing relationships as well as on-site visits with potential new manager recommendations. The cadence of these trips was severely impacted by the COVID-19 pandemic, but with international travel now almost back to normal, Marquette sent Senior Research Analyst Evan Frazier on a whirlwind tour of Europe earlier this summer. Over the course of almost a week, Evan met with eight investment management firms across three cities.

In this newsletter, Evan shares the perspectives, as well as more anecdotal information, he gained while on the ground in Europe, including insights on the region’s economy, the corporate landscape, and the unique set of opportunities and challenges currently facing international markets.

Read > Observations from Across the Pond

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Fitch Downgrades U.S. Credit

Fitch Ratings unexpectedly downgraded the U.S. government’s credit rating one notch from AAA to AA+ on August 1, 2023. This is only the second downgrade in history, after S&P Global Ratings, then Standard & Poor’s, made the same adjustment shortly after the 2011 debt ceiling crisis; S&P has maintained the AA+ rating since. Moody’s — the third major U.S. rating agency — still has the U.S. at its highest Aaa rating. Fitch noted the downgrade reflects expected fiscal deterioration over the next three years, the country’s high and growing debt burden, and an erosion in governance over the last several years, marked by bipartisan standoffs and last-minute resolutions. The downgrade and timing have drawn criticism from the Biden administration and economists, citing economic strength and the minuscule risk of the U.S. actually missing any debt payments.

While in practice the downgrade will likely have minimal impact, with the U.S. government broadly considered one of the safest borrowers, markets are reacting. Treasuries initially rallied on the news, anticipating the same flight to quality seen in 2011, though that sentiment reversed this morning, with yields at one point breaching a key resistance level of 4.1% — a level last seen in November 2022. Also likely contributing to the move today is the Treasury Department’s announced plans to sell a higher-than-expected amount of longer-dated securities next week, as it works to replenish the Treasury General Account (reference Marquette’s recent newsletter for additional context). The U.S. dollar initially dipped on the news but has since rallied and is up on the day amid higher yields. U.S. equities, after a steep run, are down modestly today, with growth equities leading the group lower.

Print PDF > Fitch Downgrades U.S. Credit

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Emerging From the Depths: An Overview of the Emerging Market Debt Opportunity Set

Emerging market debt (EMD) has earned a checkered reputation at best from institutional investors. The asset class is large, complex, and comes with unique risks that can lead to “throwing the baby out with the bath water” when things go wrong. 2022 was a challenging year for investors across asset classes, and emerging markets headlines ranging from the meltdown in Chinese property developers to Russia’s invasion of Ukraine only complicated the investment case for EMD. That said, historically the asset class has tended to rebound strongly from drawdown events, and that has so far been the case this year.

This newsletter revisits the dynamics of emerging markets debt, reviews 2022 performance, and discusses the investment opportunity from here.

Read > Emerging From the Depths: An Overview of the Emerging Market Debt Opportunity Set

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Emerging Opportunities Beyond China

Equity performance in China, with the MSCI China Index down 5.5% through the first half of the year, has disappointed amid hopes for a strong post-COVID recovery. While macro data started the year strong, momentum quickly waned, with a cautious consumer and a slowdown in manufacturing. China’s property sector troubles have continued, and U.S./China tensions remain, with the U.S. moving toward stricter regulation and reduced investment in the Chinese technology sector in 2024. Along with human rights concerns and the general unpredictability of the Chinese government, the debate around China’s investability continues on.

Take China out of the emerging markets picture, however, and the story is different. The MSCI Emerging Markets Index excluding China — the largest single country weight in the index at nearly 30%¹ — has outperformed the broader benchmark since late 2021. Latin American countries like Brazil and Mexico — almost 6% and 3% weights in the index, respectively — have benefited from central banks that began their monetary policy tightening cycle earlier. Additionally, as renewable energy trends continue, Latin American regions rich in natural resources should see exports grow. Nearshoring trends have also benefitted emerging market countries such as Taiwan — the second largest country weight in the index at nearly 16% — and Mexico, with the latter exporting nearly as much to the U.S. as China, something not seen since 2003. And in India — the third largest country weighting in the MSCI EM Index at approximately 15% — government reform programs have drawn in significant investor flows.

Looking into the second half of the year, the evolving macro picture in China, including any potential stimulus, will continue to be a driving factor of overall MSCI EM performance. And outside of China, there are a number of interesting trends playing out across the emerging markets space that should present investment opportunities for active managers.

 

¹All country weights as of June 30, 2023

Halftime Adjustments

For anyone who regularly reads these letters, recall the market preview edition opined on the outlook for asset classes in 2023, particularly the likelihood of each delivering positive returns for the upcoming year. Given that we are halfway through the year, we would like to use this letter to make “halftime adjustments” to our outlook; with NFL training camps set to open later this month, we couldn’t resist the urge to borrow a football term. We hope this is a quick beach read as you enjoy your summer vacations and prepare for the second half of the year.

This edition re-assesses the outlook for fixed income, equities, and real estate for the second half of 2023.

Read > Halftime Adjustments

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

2023 Halftime Market Insights Video

This video is a recording of a live webinar held July 19 by Marquette’s research team, featuring live, in-depth analysis of the second quarter and themes we’ll be monitoring in the second half of the year.

Our Market Insights series examines the primary asset classes we cover for clients including the U.S. economy, fixed income, U.S. and non-U.S. equities, hedge funds, real estate, infrastructure, private equity, and private credit, with presentations by our research analysts and directors.

Sign up for research alerts to be invited to future webinars and notified when we publish new videos.
For more information, questions, or feedback, please send us an email.

The Tides of Trade

As globalization has slowed in recent years, geopolitical and geoeconomic risks have reemerged across global markets. Amid disrupted shipping lanes, upended supply chains, and economic sanctions, all markets — developed or emerging — are vulnerable to some degree. While these risks are nearly impossible to eliminate, they can be managed, and efforts to minimize exposures seem to be driving a trend of regionalization across markets. To help visualize this trend, this week’s chart highlights economies (green) that may benefit from increasing regionalization based on three core constraints.

First, direct geographic access to primary shipping lanes. The OECD estimates that around 90% of all traded goods travel by sea. This suggests that countries with both direct access to shipping lanes (dashed lines) and fewer choke point exposures (blue circles) have competitive advantages over those without access or those vulnerable to bottlenecks. Second, industrial capability. Countries with greater material inputs, labor pools, and facilities inherently have a comparative advantage over those without. Third, foreign exchange purchasing power. Relative to the U.S. dollar or the euro, countries utilizing weak alternative currencies have a comparative advantage in attracting investment and in production costs. This textbook dynamic heavily suggests that denominating costs in relatively weak currencies may be the strongest differentiator between otherwise equal markets.

While there are certainly many other dynamics and constraints at play including multilateral trade agreements and demographics, direct access to shipping lanes, industrial capability, and foreign exchange rates offer three core measures to assess and expand on.

Print PDF > The Tides of Trade

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

It’s Getting Hot in Here

If global temperatures rise more than 1.5° Celsius the planet and its inhabitants could face severe consequences as a result of climate change. In 2022 — using temperatures from 1951–1980 as a baseline — the average global temperature rise was 1.4° Celsius, pushing the planet close to its tipping point. We are already experiencing more frequent and severe heatwaves, droughts, floods, and storms as well as rising sea levels and melting ice sheets. In fact, 2015–2022 were eight of the warmest years on record. The effects of rising temperatures are impacting people, ecosystems, and economies around the world and will only intensify in the coming decades unless we can bend the emissions curve and stabilize global temperatures.

To do so, the Intergovernmental Panel on Climate Change — a scientific body established by the United Nations and comprised of hundreds of climate scientists — has urged immediate, rapid, and large-scale reductions in greenhouse gas emissions. This would require systemic changes and large investments across all sectors of the economy, especially within energy, agriculture, transportation, heavy industry, and buildings.

For investors who are so inclined, there are a variety of methods to assist the cause, particularly for reducing portfolio-level climate risks as well as leveraging assets to foster society wide-decarbonization that aligns with a net zero future. Approaches can include engaging high-emitting companies to set science-based emissions reduction targets and create climate transition plans, increasing investments in “climate solutions” such as renewable energy infrastructure, assessing portfolios and assets for exposures to physical and transition-related climate risks, and subjecting a portfolio to climate-related stress tests and scenario analysis. Of course, all of these approaches involve trade-offs between risk, return, and impact; investors will ultimately have to decide the appropriate balance among these principles based upon overall portfolio and organizational goals.

Print PDF > It’s Getting Hot in Here

 

Source: See IMF data on annual surface temperature changes

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.