Matthew PeronChief Investment Officer, Senior Managing Director | 2018

Emerging Market Equity Positioning

A key element of investment success is a long-term perspective.

DIMMING GLOBAL GROWTH PROSPECTS

A key element of investment success is a long-term perspective. With it, investors can assess the long-term impact of fundamental, economic, and demographic changes on their portfolios. They can then allocate their portfolios more effectively, focusing on increasing returns over an extended time horizon. Unfortunately, global growth prospects for the next decade have dimmed, leaving investors with more muted return expectations than they have been accustomed to historically.

Some background is helpful. In the wake of the 2008-09 financial crisis, global potential output growth—the total economic output that nations can produce without generating damaging inflation—has fallen significantly. The causes of the slowdown are the subject of considerable debate within the economic community, with some arguing that a “secular stagnation” is to blame while others cite a “global savings glut.” While an analysis of the specific forces behind the slowdown are beyond the scope of this paper, the fact is that the trend predates recent developments and was evident long before the crisis struck.

The charts below show the simple math of adding up productivity growth and labor force growth. For each G-7 economy, the starting coordinate is the 1957-2007 average for productivity growth and labor force growth. The same productivity data is not available for Brazil, Russia, India, China (BRIC) economies, so we substitute GDP per person employed as a proxy, and we use the 1991-2007 period as a starting coordinate. In the case of both cohorts, the ending coordinates near the arrowheads mark the average productivity growth over the past six years and potential labor force growth for the next six years.

The key here is the slanting lines. In terms of the basic building blocks of economic growth, every advanced economy is heading in the wrong direction. The story is more complicated with BRIC economies. While the trend is apparent, both India and China still enjoy significantly positive growth differentials relative to advanced economies. We think this relatively more positive outlook is representative of the Emerging Asia region as a whole.

Overall, the International Monetary Fund estimates potential growth in advanced economies over the next decade at 1.8%, well below the pre-crisis rate of 2.25%. In EM economies, potential growth is expected to decline from an average of about 6.5% to 5.2% a year between 2018 and 2027. However, there is considerable divergence between regions, with Asia expected to significantly outperform in the coming years.


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Sources and Disclosures

Sources for 4P Data

BCA Research

Bloomberg

Bureau of Labor and Statistics

CEIC Data

CIA World Factbook

Cornell University

FactSet

Global Innovation Index

Goldman Sachs

Heritage Foundation

Insead

International Monetary Fund

Ned Davis Research

OECD

SC Johnson College of Business

St. Louis Federal Reserve

tradingeconomics.com

WIPO

World Bank



Important Disclosures

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

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