Bucking the normal “sell in September” mantra, stocks have rallied over 3% since the beginning of the month; specifically, the emerging markets. We entered the year bullish on the emerging market economies, thus overweight in our allocation. However, due to increasing inflation and reductions in growth forecasts, the emerging markets were down for the first eight months of the year. We have been seeing some signs of stabilization as economic data remains healthy, specifically in China. Emerging markets will now comprise over 50% of global GDP. This has resulted in a 10% move in the last two weeks. We still remain overweight and believe that the growth dynamics in these markets (both emerging and frontier¹) offer investors a great long-term opportunity.
Come Bite the Apple?
Apple announced their new iPhone earlier this week; however, investors greeted it with little fanfare. The new iPhone 5S will have fingerprint authentication and a distinctly faster processor. The 5C release, which was intended to be a lower-end phone for emerging markets has disappointed, specifically on the price point. At $550, we believe this will be too high to drive market share gains in emerging markets, which is key for Apple revenue growth. It seems that the company would rather sacrifice market share for margins, and we will see if this strategy works. Unfortunately, the wireless handset marketplace can change rapidly. A decade ago, Blackberry owned the enterprise market and Nokia owned the consumer space.
Money for Nothing
The bond market continues to welcome any issuance with yield. Earlier this week Verizon issued just under $50 billion in debt to fund its $130 billion purchase of Vodafone’s share of Verizon Wireless. This eclipses Apple’s $17 billion deal earlier this year. While their cost of debt increased due to the deal, investors ate it up and those spreads (yields above treasuries) have since declined significantly.
From Russia with Love
Earlier this week, Vladimir Putin engineered a “potential” deal with Syria to ward off a U.S. strike. Only time will tell if Syria turns over its chemical weapons to a third party; however, equity markets breathed a sigh of relief. While the humanitarian situation in Syria remains grave, investors continue to be concerned about what the effect of a strike would have on consumer confidence and gasoline prices. This concern looks to have been pushed back for now.
Our Takeaways from the Week:
- Emerging markets still offer a long-term opportunity for equity investors
- We will be deluged in the financial press for months discussing the Twitter IPO filing