Combined market cap of Wells Fargo and JP Morgan ($440bn) exceeds that of every Energy and Materials company in BRIC; Less than three years ago, those two banks were valued at less than half the market cap of the BRIC commodity sectors, indicating how quickly market leadership has rotated away from China to the US real estate story
July 19, 2013 Leave a comment
How the mighty have fallen: EM edition
| Jul 18 11:03 | 2 comments | Share
Today, the combined market capitalization of Wells Fargo and JP Morgan ($440bn) exceeds that of every Energy and Materials company in Brazil, Russia, India and China ($420bn). Less than three years ago, those two banks were valued at less than half the market cap of the BRIC commodity sectors, indicating how quickly market leadership has rotated away from China to the US real estate story.That’s from BofAML Michael Hartnett’s latest Thundering Word which runs through the bull and bear case for EM. A taste of the bull case (with the bear resting on the idea that EM assets have only recently started to underperform, weaker China growth and a stronger dollar are not a good combo for EM and the EM “yield” argument is also reversing):
1. Secular downtrend in bond yields to continue
We believe the secular bull case for EM now rests on the ability of interest rates to continue their decline of the past 15 years from high double digits to single digits (chart 6). If economic weakness can force politicians in Emerging Markets to return to policies of disinflation, fiscal discipline and central bank independence, then the longer-term case for EM improves. After all, EM continues to have a substantial yield advantage relative to DM, and aging populations in the west will keep the need for income high.
2. The Chinese ease before the Americans taper
We believe the Emerging Market rally can have legs if over the next two to three quarters, the US economy stumbles, necessitating a bout of USD weakness, while simultaneously the Chinese ease and successfully boost economic growth. Put another way, if China eases and successfully makes 7.5% the floor for Chinese growth, while the delay of US tapering or rate hikes causes 3% to be the ceiling for the 10 year Treasury yield, EM assets will likely outperform.
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