Bill Gross: Are Risk Markets Overpriced? 3

Risk markets are outperforming global bond markets

In his first investment outlook for 2017, Bill Gross of Janus Capital (JNS) draws investor focus towards the behavior of risky markets vis-à-vis global markets. “Happiness has dominated risk markets since early November and despair has characterized global bond markets,” said Gross in his January 2017 investment outlook.

Visually proven (above) by the movement of the emerging market-tracking funds, the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) and the iShares MSCI Emerging Markets ETF (EEM) against global bond markets since November 2016, emerging markets have indeed been doing well since November last year. The EMB is up about 3% (2.58% as of Jan 13 close); EEM has gained 4.15%, while the global bond fund, the Vanguard Total International Bond ETF (BNDX) is down -1.01% since November 11, 2016. So, what’s driving these risk markets?

What’s driving risk markets?

Risk markets are growing on the back of stronger US growth expected in the light of:

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  1. Expected fiscal stimulus
  2. Reduced regulation, and
  3. Tax reform

Risk markets are expecting these 3 Republican promises (as listed above), to boost growth. A hawkish Fed looking to tighten interest rates as we move ahead should help inflation move closer to the Fed’s 2% target. 10-year Treasury rates are already up by 60 basis points, from 1.8% in November 2016 to 2.4% currently.

So, emerging markets are clearly gaining ground on better expectations for US growth. Growth that is still not certain; growth that may need more than just Republican promises; and growth that may require core inflation to rise and deliver. Trumponomics will take its time to effect the US economy (SPY). Yet, risky markets have already begun pricing it in, leading most emerging market indexes up. Argentina’s Merval index is already up 11.6% so far this year, Brazil’s Bovespa up 5.7%, Turkey’s BIST100 up 4.3%, Philippine’s’ PSEi is up 5.8%, and the Dow Jones Asia-Pacific TSM index has gained 3.7% YTD (as of Jan 13).  The big question that arises: are emerging markets being too optimistic?

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