Why emerging markets may benefit the most from a China-U.S. trade deal

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Rob Cittadini, senior director, U.S. institutional, discussed the latest trade news, recently released economic data and third-quarter earnings season.

Positive trade headlines boost global markets

The ongoing trade spat between the U.S. and China has been a rollercoaster ride of ups and downs, Ristuben said. He characterized the week of Nov. 4 as an up week, due in part to comments from the Chinese government that the two countries may be close to reaching an agreement to roll back existing tariffs on each other’s goods. This positive development helped lift markets around the globe the week of Nov. 4, Ristuben noted, with the S&P 500® Index rising approximately 0.6% and the STOXX® Europe 600 Index climbing 1.2%. Emerging markets fared even better, ending the week up roughly 2.3%, per the MSCI Emerging Markets Index.

“It’s not too surprising that emerging markets equities performed so strongly this week,” Ristuben said, “because the biggest beneficiaries of a potential trade agreement between the U.S. and China will likely be those markets that have the most exposure, economically, to trade.” Emerging markets, he said, have the highest levels of exposure, followed by Europe.

Growth in U.S. services sector highlights week of solid economic data

Economic data released the first week of November has generally been fairly solid, Ristuben said. As evidence, he pointed to the Institute for Supply Management (ISM)’s non-manufacturing PMI (Purchasing Managers’ Index), which climbed to 54.7% in October. This marked a roughly 2% rise from September, Ristuben observed, which is fairly substantial.

“Even more significantly, the employment component of this survey rebounded from 50.4% in September to 53.7% in October—and that’s really good to see,” he remarked. Why? The bulwark against a U.S. recession is the American consumer, and the key to a strong consumer is continued employment, Ristuben explained.

There was even a bright spot in the U.S. manufacturing sector, as the ISM’s manufacturing PMI for October ticked up slightly from the previous month, Ristuben noted, adding that the manufacturing sector still remains in contraction. Jobless claims, meanwhile, dropped the week of Nov. 4, and consumer sentiment stayed essentially flat, he said.

“All in all, while the economic news from this week wasn’t universally positive, it was certainly good enough to make markets feel a little bit better about the arc of the U.S. economy,” he said.

Earnings season update

Although third-quarter earnings season continues to trend better than expected in the U.S., growth continues to be negative, to the tune of roughly -2% to -3%, Ristuben said. “This means that the third quarter is likely to be the third straight quarter of negative earnings for S&P 500 companies,” he said, noting that this story is playing out in similar fashion across the globe.

“Earnings are under pressure due to increased input costs from the China-U.S. trade war, in addition to higher labor costs stemming from wage growth around 3%,” Ristuben explained. He added that while the pressure corporate earnings are facing isn’t extreme, it makes it harder—in his opinion—to buy into the consensus expectations for earnings growth in 2020. “I believe it’s wise to have modest expectations for corporate earnings heading into the new year,” he said, adding that he believes industry expectations will be lowered a bit in the future.

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