Emerging markets: A re-emerging opportunity
Many investors have been reluctant to invest in emerging market equities because of concerns about volatility. We believe the fundamentals argue in favor of a strategic allocation.
The U.S. Federal Reserve (Fed) announced a much-anticipated one-quarter-percentage-point cut to the federal funds rate on Wednesday – the first such move in more than a decade. The benchmark rate now sits at 2.00% to 2.25%. The rate cut is seen as a pre-emptive move based on increasing pressures from trade turmoil and uncertainty about the strength of global economic growth.
“This week’s rate cut by the Fed was widely expected. Equity markets had been anticipating a rate cut, but Fed Chairman Jerome Powell’s press conference commentary was perceived as unexpectedly hawkish and hence markets reacted in a ’buy the rumor, sell the news’ reaction. As active investors, we believe that the equity markets will follow the underlying fundamentals of businesses,” said Dan Hanson, CIO of Ivy Investment Management Company (IICO). “On balance, we are seeing continuing positive economic growth, a supportive policy backdrop and healthy corporate prospects.”
Ivy’s base case at the start of the year forecast up to two rate increases in 2019. However, based on concerns over trade and global growth, we believe the Fed will continue to become more accommodative. In addition to this week’s move, we anticipate one or two more cuts by the end of the year.
“I think the response of the Fed has been appropriate considering the environment. The fixed income market is pricing in two cuts in 2019, so if that happens there shouldn’t be much response,” according to Mark Beischel, global director of fixed income for IICO. “The outstanding question is trade – if we reach a trade deal, then management that wants to reinvest in their companies can get that done without lingering uncertainty.”
The move by the Fed comes after the July 26 report on second-quarter U.S. gross domestic product, which showed 2.1% growth but trade impacting the U.S. economy. Negotiations between the U.S. and China stalled again this week, furthering concern over the impact to growth. Ivy still forecasts global growth at 3.2% in 2019 but with risks to the downside. We believe the underlying fundamentals — a robust job market, rising wages and low inflation — should support continued growth during the rest of 2019.
Past performance is not a guarantee of future results. Risk factors: Investment return and principal value will fluctuate and it is possible to lose money by investing. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Fixed income securities are subject to interest rate risk and, as such, the net asset value of a fund may fall as interest rates rise. These and other risks are more fully described in a Fund's prospectus.
The opinions expressed are those of Ivy Investment Management Company and are subject to change at any time based on market and other current conditions. No forecasts can be guaranteed. This information is not a recommendation to purchase, sell or hold any specific fund or security mentioned or to engage in any investment strategy. Funds or securities discussed may not be suitable for all investors.