Authors
Edge Capital Research Team
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Update on Global Equity Correction
Summary
It is during these times that we rely on our investment process and the work our team dedicates to studying risk, asset allocation, and corporate fundamentals. On August 18th, this work led us to publish an Update on Emerging Asia where we recommended investors exit China and broadly reduce their exposure to Asian emerging markets. In our mind, weakening corporate fundamentals and increased currency volatility outweighed attractive valuations across the region. Our work also suggests that U.S. economic and corporate fundamentals remain sound. The economy continues to benefit from job gains, strong housing fundamentals, and low energy prices supportive of the end consumer. For these reasons and many others, we are maintaining our equity exposure to U.S. corporations. Outside of the U.S., our confidence in the European recovery story remains intact. European growth is tepid but our research suggests that economic trends continue to improve in Europe and attractive opportunities remain. European revenue and earnings trends also continue to mend from the prolonged recession that has plagued the area for several years. The European Central Bank remains accommodative, and for these reasons we encourage investors to stay the course in Europe.
As always, we are monitoring the markets closely and prepared to act accordingly should new information present itself questioning our growth and fundamental beliefs. We believe the decision to reduce Asian exposure is an example of our ability to revise and adjust prior forecasts in light of new information. Two factors we are monitoring closely are China-induced economic and fundamental contagion to other regions of the world, hampering growth beyond current expectations. We are also tracking the underlying liquidity of our fixed income investments to ensure our client’s “safe haven” assets are just that. Our perspective is that the current market correction will resemble previous periods of turbulence (similar to 2011), and we do not expect a deeper, prolonged drawdown or the start of a new bear market at this time. As expected, we will continually look for evidence that refutes our base-case.