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Market Update: 05-21-18

FIVE KEYS TO EMERGING MARKET OUTLOOK

John Lynch Chief Investment Strategist, LPL Financial | Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial

We continue to prefer emerging market (EM) equities in tactical asset allocations. EM equities have given back strong early-year gains, pushing the MSCI EM Index into negative territory year to date on a total return basis. Many headwinds have weighed on EM stocks, including rising interest rates, U.S. dollar strength (and related weakness in EM currencies), and trade war fears. Here we highlight five keys to our EM outlook.

FIVE KEYS TO EM OUTLOOK

Interest rates and monetary policy. EM’s latest bout of underperformance began on April 1, when the latest move higher in the 10-year Treasury began [Figure 1]. Since April 2, the 10-year yield has gone from 2.73% to 3.07%, while the S&P 500 Index has returned 5.4% and the MSCI EM has lost 2.5%. Expectations priced into the bond market for Federal Reserve (Fed) rate hikes in 2018 (based on fed funds futures market prices) have also shifted over to four total hikes in 2018 (>50%) rather than three, with the higher inflation expectations and higher short-term rates putting some...

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