Trevor Greetham's Investment Clock update: Emerging market troubles

Slower Chinese growth and the gradual unwinding of Fed QE is causing the most pronounced period of emerging market underperformance since the mid-1990s. We think the spill over into developed markets will be short-lived with emerging market policy makers taking action to restore confidence. The 1990s saw a rolling series of crises in Mexico, Asia and Russia, but developed equities posted some of their best returns.

The Investment Clock is in equity-friendly Recovery mode. With Chinese growth slowing, excess capacity is again pushing commodities lower, while labour markets have yet to make up the ground
lost during the financial crisis. A lack of inflationary pressure allows the big central banks to maintain a relatively easy stance despite a pick-up in growth. This is good news for developed market stocks.

LEAD INDICATORS IN FOCUS

Growth
- The world economy is experiencing a US-led upturn in growth as fiscal headwinds ease and confidence returns.

- However, slower Chinese growth and the gradual normalisation of US monetary policy will put downward pressure on emerging markets.

Inflation

- Excess capacity and the slowdown in China are pushing commodity prices lower and our global inflation scorecard continues to point downwards.

- The lack of inflationary pressure should allow the big central banks to maintain a relatively easy stance despite the pick-up in growth.

CURRENT ASSET ALLOCATION POSITIONING

- Our multi asset funds continue to hold a large overweight position in developed market stocks, particularly the US and Japan markets that benefit from dollar strength.

- Structural headwinds make us cautious on commodities and the emerging markets, while the prospect of eventual interest rate rises is likely to weigh on government bonds and interest rate sensitive sectors like consumer staples, utilities and property.