We are downgrading the “Go Global” portfolio strategy from overweight to market weight and raising “Stay Home” (in the US) from underweight to market weight.
Overseas earnings remain impressive, but the rallies in emerging market economies’ stock markets have been led by just a handful of AI-related stocks. Last week’s rout in South Korea showed how vulnerable such concentration leaves these stock markets. Additionally, European economies look set to struggle as France’s fiscal problems loom, and China’s economy depends almost entirely on exports. Plus, the Middle East war could flare up again before or after the US midterm elections on November 3, keeping oil prices, inflation, and interest rates elevated.
Here’s more:
I. Global Bonds
The global bond rout took a breather last week. Yields fell in all eight major bond markets we track, led by the US (chart). The US 10-year Treasury yield fell 16bps to 5.08%, even as the CPI rose 3.7% y/y and the PPI jumped 6.3% in September. That suggests bond investors see these rates as attractive relative to their long-term inflation expectations.
The spread between French and German 10-year yields has stabilized at around 137bps, near its recent high (chart). Spreads for Italy, Greece, Spain, and Portugal have eased slightly from their late-September peaks. Contagion from France has eased for now. But France’s own fiscal risk premium hasn’t. The National Assembly began debating France’s 2027 budget on October 13. Meanwhile, Paris is burning!
II. Global Stocks