Emerging Market Equities, Excluding China, Poised for Outperformance: Matt Orton

Emerging market equities excluding China can outperform over next 3 years: Matt Orton

We are finally seeing increased market breadth translate into increased price breadth and despite some of the heavyweight names being down in today's session, the overall market still held up okay and a lot of stocks did well."And almost like what you were saying about the Indian market, even though the US market continues to push towards all-time highs as well, what is really important is that there is better breadth," says Matt Orton, Raymond James Investment. How you are looking at the overall inflation print, what the expectation could be and how do you believe that will really alter or determine the Fed's rate action? Matt Orton: The inflation print coming tomorrow, later on today for all of you, is certainly important in context for the overall market. But what is really more important was Nvidia yesterday and the jobs reports that we are going to get next week. Inflation is largely expected to be in line and I think one of the key conclusions that we got from Jackson Hole last week was that the Fed is really focusing now on its dual mandates. So, inflation, unless we get a really big surprise tomorrow, which is not my expectation, I really think that the market is going to be squarely focused on whether or not we see deterioration with respect to the jobs picture next week. Obviously, today we got stronger than expected GDP data. It has always been my base case that this economy is heading for a softer landing, not a hard landing. So, we are going to want to see confirmation for that and really then the Fed can continue to ease at a gradual pace, 25 basis points per meeting and that is very constructive for the overall setup. And almost like what you were saying about the Indian market, even though the US market continues to push towards all-time highs as well, what is really important is that there is better breadth. We are finally seeing increased market breadth translate into increased price breadth and despite some of the heavyweight names being down in today's session, the overall market still held up okay and a lot of stocks did well. So, when I talk to our clients, there is a lot of opportunities beneath the surface that you can feel good about continuing to put money to work in it, so that is exciting to me. I guess the next trigger is going to be the September rate cut, which the markets and everyone seems to have factored in or at least that is the assumption after Jackson Hole. But in the run up to that, do you sense volatility in the markets? So, do you think it is pretty much par for the course? What is only unknown is the quantum of it. Matt Orton: I think that is a really good point because given that the economic data continues to come in fairly strongly or I guess I should say benignly that there is no signals that the economy is falling off a cliff, what that says to me is that the expectations that the market is expecting 100 basis points of rate cuts through the end of this year has gotten a little ahead of itself. So, I do think there is going to be some volatility heading into the September rate cut as the market tries to digest some of these numbers and maybe readjust its rate cut expectations closer to 75 basis points. So, I encourage investors, if you do get that volatility, if you do start to get some downside, to use that opportunistically because there are so many people that are still overweight cash that have not put a lot of money to work and so there is finally an opportunity to start to use that downside opportunistically and really set yourself up well heading into year-end because I do think there is a lot of reasons for optimism riding that earning strength heading into the end of the year. In your newsletter, you are of the view that even though markets are running ahead of themselves, like you said, in terms of rate cut expectations, you expect that the market uptrend could continue till the end of the year? Why is that? And if I add one more ingredient in the melting pot, you have US elections later this year. Matt Orton: Yes, so there is certainly a lot of catalysts. There is a lot of, I will say, event risk that is still baked into the market. But to me, the market is underappreciating just to general resiliency of the overall economy and I think the strength in earnings has also been slightly overlooked by the market. We have seen a lot of earnings breadth growth and you are finally starting to see that translate to better price breadth. But there is a lot of parts of this market called parts of industrials, parts of the artificial intelligence trade that are more tangential, that are more essential to building out to finally realise the monetisation that we need to see. So, building proper plant and equipment, your electrical equipment companies that are providing cooling services to data centres, building up the grid and utilities, since we do not have enough power to actually power all of the data centres around the country. There is a lot of room for earnings expansion over the next quarter or so and I think that can propel the market into the end of the year and even with the election backdrop, markets tend to rally post elections whenever you look at this historically speaking. But I think overall, the context of likely divided Congress is also constructive for the market overall. So, while there might be some headline risk with respect to which party wins the presidency, it is highly unlikely that we are going to see a change from divided government at the congressional level and that is where legislation is passed, that is where a lot of potential changes that investors might be worried about are actually going to transpire. So, as long as you have divided government, I think that keeps the status quo in place, which is largely supportive for markets. So, when you combine earnings and rate cuts finally starting to take place, I think that is largely supportive of a good market backdrop heading into the end of the year. If you have to bet on one asset class for the next three years and only one asset class, it could be across categories, which is bonds, Bitcoin, gold, emerging market equities, even US stocks, which is that one asset class you would go long on? Matt Orton: I would be most optimistic on emerging market equities and I will say emerging market equities ex-China. There is a tonne of momentum that that emerging market equities can gain and weakening US dollar on the lower rate backdrop is supportive of EM equities. You have got increasing weights to India. You have dynamism with respect to the AI trade. And it is very-very under-owned across investor portfolios. So, I think there is a lot of reasons that EM can finally start to outperform when you strip China out of it.

Emerging market equities excluding China can outperform over next 3 years: Matt Orton

"And almost like what you were saying about the Indian market, even though the US market continues to push towards all-time highs as well, what is really important is that there is better breadth," says Matt Orton, Raymond James Investment. How you are looking at the overall inflation print, what the expectation could be and how do you believe that will really alter or determine the Fed's rate action? Matt Orton: The inflation print coming tomorrow, later on today for all of you, is certainly important in context for the overall market. But what is really more important was Nvidia yesterday and the jobs reports that we are going to get next week. Inflation is largely expected to be in line and I think one of the key conclusions that we got from Jackson Hole last week was that the Fed is really focusing now on its dual mandates. So, inflation, unless we get a really big surprise tomorrow, which is not my expectation, I really think that the market is going to be squarely focused on whether or not we see deterioration with respect to the jobs picture next week. Obviously, today we got stronger than expected GDP data. It has always been my base case that this economy is heading for a softer landing, not a hard landing. So, we are going to want to see confirmation for that and really then the Fed can continue to ease at a gradual pace, 25 basis points per meeting and that is very constructive for the overall setup. And almost like what you were saying about the Indian market, even though the US market continues to push towards all-time highs as well, what is really important is that there is better breadth. We are finally seeing increased market breadth translate into increased price breadth and despite some of the heavyweight names being down in today's session, the overall market still held up okay and a lot of stocks did well. So, when I talk to our clients, there is a lot of opportunities beneath the surface that you can feel good about continuing to put money to work in it, so that is exciting to me. I guess the next trigger is going to be the September rate cut, which the markets and everyone seems to have factored in or at least that is the assumption after Jackson Hole. But in the run up to that, do you sense volatility in the markets? So, do you think it is pretty much par for the course? What is only unknown is the quantum of it. Matt Orton: I think that is a really good point because given that the economic data continues to come in fairly strongly or I guess I should say benignly that there is no signals that the economy is falling off a cliff, what that says to me is that the expectations that the market is expecting 100 basis points of rate cuts through the end of this year has gotten a little ahead of itself. So, I do think there is going to be some volatility heading into the September rate cut as the market tries to digest some of these numbers and maybe readjust its rate cut expectations closer to 75 basis points. So, I encourage investors, if you do get that volatility, if you do start to get some downside, to use that opportunistically because there are so many people that are still overweight cash that have not put a lot of money to work and so there is finally an opportunity to start to use that downside opportunistically and really set yourself up well heading into year-end because I do think there is a lot of reasons for optimism riding that earning strength heading into the end of the year. In your newsletter, you are of the view that even though markets are running ahead of themselves, like you said, in terms of rate cut expectations, you expect that the market uptrend could continue till the end of the year? Why is that? And if I add one more ingredient in the melting pot, you have US elections later this year. Matt Orton: Yes, so there is certainly a lot of catalysts. There is a lot of, I will say, event risk that is still baked into the market. But to me, the market is underappreciating just to general resiliency of the overall economy and I think the strength in earnings has also been slightly overlooked by the market. We have seen a lot of earnings breadth growth and you are finally starting to see that translate to better price breadth. But there is a lot of parts of this market called parts of industrials, parts of the artificial intelligence trade that are more tangential, that are more essential to building out to finally realise the monetisation that we need to see. So, building proper plant and equipment, your electrical equipment companies that are providing cooling services to data centres, building up the grid and utilities, since we do not have enough power to actually power all of the data centres around the country. There is a lot of room for earnings expansion over the next quarter or so and I think that can propel the market into the end of the year and even with the election backdrop, markets tend to rally post elections whenever you look at this historically speaking. But I think overall, the context of likely divided Congress is also constructive for the market overall. So, while there might be some headline risk with respect to which party wins the presidency, it is highly unlikely that we are going to see a change from divided government at the congressional level and that is where legislation is passed, that is where a lot of potential changes that investors might be worried about are actually going to transpire. So, as long as you have divided government, I think that keeps the status quo in place, which is largely supportive for markets. So, when you combine earnings and rate cuts finally starting to take place, I think that is largely supportive of a good market backdrop heading into the end of the year. If you have to bet on one asset class for the next three years and only one asset class, it could be across categories, which is bonds, Bitcoin, gold, emerging market equities, even US stocks, which is that one asset class you would go long on? Matt Orton: I would be most optimistic on emerging market equities and I will say emerging market equities ex-China. There is a tonne of momentum that that emerging market equities can gain and weakening US dollar on the lower rate backdrop is supportive of EM equities. You have got increasing weights to India. You have dynamism with respect to the AI trade. And it is very-very under-owned across investor portfolios. So, I think there is a lot of reasons that EM can finally start to outperform when you strip China out of it.