Global financial markets continue to be driven by shifting perceptions of the efficacy of central bank monetary policy. The recent rehabilitation of risk assets owes much to increasing market participant confidence that the major central banks are fully aware of the downside risks facing global economies, understand the feedback loop between policy action and rhetoric on one hand, and business and consumer confidence on the other, and are determined to prevent these downside risks from materialising. The recent Federal Operating Market Committee (FOMC) statement, revisions to the Summary of Economic Projections (SEP) and Yellen testimony have been received positively by investors, part of an ongoing process of a partial reassessment of the –Federal Reserve’s monetary reaction function on the part of markets.
In the first of this week’s articles, Steve Friedman examines the SEP revisions and recent Fed communications for clues as to whether the Fed’s reaction function is, indeed, shifting dovishly, as some investors perceive, or whether these subtle changes merely represent a shift in the Fed’s own assessment of the macroeconomic environment.
Emerging market equities, as represented by the MSCI Emerging Markets Index, have now recovered a full 20% since their lows on the 21st January. Given this impressive rebound, Daniel Morris reviews emerging market valuations, and asks whether emerging market equities are cheap or not at current levels. He finds that the real story is not so much in the aggregate valuations (which appear moderately cheap but in a world in which emerging market valuation measures may be misleading) but in the very considerable valuation differences across regions, countries and sectors. The strong conclusion is a reaffirmation of the theme of abundant idiosyncratic opportunities for careful bottom-up stock pickers.
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