Issue
77
Monthly
Market
Newsletter
Glovista Global Perspectives
May/16
This Issue:
FED Policy Uncertainty Rises as Economic Calendar Weakens and
Medium-term Downside Risks to Growth Escalate with Rising
Prospects of Trump Presidency; Glovista Sustains Defensive
Portfolio Stance
Over the past several weeks, risk markets globally have sold off across the equity
currency, credit and commodity domains, as illustrated in Figure 1. We credit the recent
sell-off in risk markets to several macro, market and technical factors, including:
Figure 1. Risk Markets Sell Off in May: Month-to-Date Returns thru May 23,
2016
Japanese Yen vs. USD
S&P Sector Performance
P.2
Ccy and Cmdty Performance
P.4
Important Interest Rates
P.4
Country-wise Monthly Performance
in USD terms (April 2016)
Brazil
Russia
7.8%
Japan
4.6%
UK
3.0%
Frontier Mkts
2.7%
2.6%
MSCI EAFE
MSCI AC World Index
-2.5%
MSCI Europe Financials Index
-3.0%
Germany
India
MSCI EAFE Index
-3.8%
MSCI EM Index
-10.8%
0.7%
0.5%
0.4%
USA
0.4%
China
-14.3%
-20.0%
2.5%
Emg Mkts
-6.1%
US Treasury 10 Year 2 Year Spread
TR/CRB Industrial Metals Producers Index
10.1%
-10.0%
0.0%
10.0%
0%
5%
10%
Source: MSCI & Bloomberg
Source: Bloomberg
1
15%

S&P500 Monthly Sector
Performance – April 2016
Weakening economic calendar out of the world’s two largest economies (Figure 2 and
Figure 3). Over the past several weeks the pace of surprises surrounding economic
releases out of the world’s largest economy (the USA) has been to the downside while
Chinese economic momentum continues to moderate (Figure 3);
Figure 2. Economic Activity Surprise Index: United States
80
Sectors
%
Change
FY1
PE
Ratio
60
40
Energy
8.65%
102.2
Materials
4.90%
18.4
Industrials
0.83%
16.6
Cons Disc
0.05%
18.3
Cons Stap
-1.46%
21.3
Technology
-5.47%
16.5
Healthcare
2.87%
15.7
Financials
3.27%
14.1
Utilities
-2.4%
17.5
Telecom
-3.14%
13.7
0.27%
17.6
20
0
-20
S&P500
-40
-60
-80
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Citi Economic Surprise - United States
Source: Citigroup Global Markets
Figure 3. Chinese Consumption Expenditure Momentum Continues to Moderate: Retail
Sales YoY Percentage Growth
25
Source: S&P
20
15
10
5
0
Dec-00
Dec-02
Dec-04
Dec-06
Dec-08
Dec-10
China Retail Sales Value YoY
Dec-12
Dec-14
Source: National Bureau of Statistics of China
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
Heightened FED policy uncertainty surrounding the timing and quantum of future adjustments to the Federal
Funds rate. In particular, the May 18 release of the minutes corresponding to the April 26-27 FOMC meeting
jolted interest rate, currency and commodity markets (Figure 4). As illustrated by Figure 4, the May 18 release of
the April FOMC minutes reset higher the probability of a 25 basis points hike in the Fed Funds rate at the
June/July meetings from a previous 25.7 percent to a current 42.8 percent;
Figure 4. May 18 Release of Minutes for April FOMC Meeting Jolt Risk Markets by Resetting Implied
Probability of Rate Hikes in 2016
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
Release of April FOMC Minutes
10.0%
5.0%
0.0%
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
Source: Bloomberg

Likely adverse market implications emanating from a Trump victory at a juncture in which Mr. Trump has
become the de-facto GOP presidential nominee and attained front-runner status in some elections polls versus
Democratic Party de-facto nominee Hillary Clinton. Specifically, a Trump presidency could pose important
headwinds for global equities to the extent to which Mr. Trump follows through on his long-held election
promise to unwind a number of important trade agreements, including the TPP. The economic relevance of
such scenario follows on the observation that global trade has been the world economy’s major growth engine
over the past three decades (Figure 5);

Weak US and Eurozone first quarter corporate earnings season, including a marked 3.8 percent year-on-year
contraction in US EPS (Figure 6). The sustained deceleration in US corporate earnings trends alongside
weakening top line and profit margin growth raises the specter of a sustained deceleration in business fixed
investment and employment conditions (Figure 7);

Rekindled Eurozone financial sector concerns, evidenced in European financial stocks’ continued downward
spiral versus the broader market index (Figure 8).
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Gold
Silver
April
April
2016
Change
65.0%
4.9%
60.0%
17.84
15.6%
55.0%
45.92
19.8%
1292.99
Oil
Figure 5. Global Trade share of World GDP: A Trump Presidency Could Trigger a
Reversal in Decades-long Uptrend
EUR
1.1451
JPY
106.5
GBP
1.4612
CHF
0.9599
CAD
1.2556
AUD
0.7603
BRL
3.4358
MXN
17.177
Source: Bloomberg
0.6%
5.4%
50.0%
45.0%
1.8%
0.2%
3.4%
-0.7%
4.4%
40.0%
35.0%
30.0%
0.6%
25.0%
20.0%
Jan-60
Rates
1 Yr CD
5 Yr CD
30 Yr Jumbo
Mortgage
5/1 Jumbo
Mortgage
US Govt. 10 Year
10 Yr Swap Spread
Source: Bloomberg
Jan-70
th
April 30
Level
0.54%
1.26%
4.07%
3.16%
1.8333%
-0.1175%
Jan-80
Jan-90
Jan-00
Jan-10
World Trade as a percentage of World GDP
Source: World Bank Data
Figure 6. US Corporate Earnings Record Sizable 3.8 Percent Year-on-Year Decline
along with 1.1 Percent Year-on-Year Revenue Decline: SP500 Universe
80.0%
26.0%
70.0%
22.0%
60.0%
18.0%
50.0%
14.0%
40.0%
10.0%
30.0%
6.0%
20.0%
2.0%
10.0%
-2.0%
0.0%
-6.0%
-10.0%
Dec-09
-10.0%
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
S&P 500 Index Earnings Per Share YoY Growth (LHS)
S&P 500 Index Sales Per Share YoY Growth (RHS)
Source: Bloomberg
-4-
Figure 7. Signs of Impending Deceleration in Business Investment Spending? NFIB Small Business Capital
Expenditure Plans
120
100
80
60
40
NFIB Small Business Capital Expenditure Plans
Source: National Federation of Independent Business
Figure 8. European Financial Stocks’ Continued Downward Price Spiral versus Broad Market Benchmark
Signals Lingering Deflation Concerns
120
105
90
75
60
45
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
MSCI European Financial Sector Index Relative to MSCI European Index
Source: MSCI, Bloomberg and Glovista Calculations
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
Renewed Chinese currency weakness (Figure 9). That the recent weakening of the Renminbi coincides with
decelerating economic momentum in China signals the potential for further currency weakness in the
months ahead. In turn, under such scenario, powerful disinflationary effects are likely to ensue in the global
economy, further pressuring corporate profits growth across advanced economies.
Figure 9. China’s Renminbi Resumes Weakening Trend versus US Dollar
7.5
7.2
6.9
6.6
6.3
6
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Chinese Renminbi vs. US Dollar
Dec-13
Dec-14
Dec-15
Source: Bloomberg
Increasingly Uncertain US Policy Outlook and Signs of Maturing US Business Cycle Suggest US
Rate Hikes in 2016 Could Prove Pernicious for the Economy and Market
As we look ahead, the Glovista investment team believes a defensive portfolio stance is warranted on multiple
considerations, including current stretched US equity valuations, extended US profits cycle, US equities’ over-owned
status and the potential for policy mistakes out of the USA and Europe. Amongst those considerations, the one that
has gained the greatest relevance these past several weeks is the latter: potential for policy mistakes out of the USA
and Europe.
As noted above, the May 18 release of the April FOMC meeting minutes has fueled a material reset in the implied
probability of near-term interest rate hikes by the US Central Bank. In our view, there is little economic merit for the
US Federal Reserve to raise the Federal Funds rate in 2016. Such non-consensus view is predicated on the following
observations:

Most year-to-date economic releases of aggregate demand conditions out of the USA and Europe have been
unimpressive despite the globe’s northern hemisphere having experienced the mildest winter in over three
decades. To us, such divergently weak economic releases signal an underlying softness in the economy, likely
the result of tightening credit conditions in the USA, persistently high indebtedness levels across most of the
advanced economies and overextended business cycle / profits cycle expansion in the USA.
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
While broad measures of US wage pressures have recorded signs of incipient upward pressure (e.g. Atlanta
Fed wage indicator), a considerable portion of such wage pressure reflects knock-on effects from one-off
increases in minimum wages across a number of high profile states after a number of years of no increase.
Consequently, we expect recent wage pressure to abate over the coming months. Moreover, the wage cycle
lags the employment and capex cycle. In turn, the capex cycle lags the profits cycle. A simple observation of
the current state of affairs defining US profit dynamics strongly suggests a medium-term abatement of wage
pressures in the USA.
As a consequence of the above, we believe any additional interest rate hikes by the US Federal Reserve in 2016 are
likely to prove pernicious to the economic and market outlook. That the US election campaign has attained a degree
of polarization not seen in many decades raises the potential for the US Federal Reserve to opt for an interest rate
hike in June or July simply to prevent the appearance of meddling in the election campaign closer to the November
voting date.
Glovista Sustains Defensive Portfolio Stance
The Glovista investment team continues to embrace a defensive portfolio strategy stance, entailing underweight
equity allocations (particularly in the USA) and overweight allocations to high quality corporate debt instruments
along with exposure to selected commodity groups and non-US equities. Such defensive portfolio strategy stance is
predicated on the concatenation of macro, market and policy factors laid out above. Specifically, in equities, we
continue to hold selected exposure to high quality international equities. In fixed income, we continue to favor
intermediate-term US corporate debt while on the commodities front, we favor selected exposure to agriculture and
precious metals.
Emerging Market Perspectives
Case for Sustained EM Equities’ Outperformance versus DM Peers Reinforced by Strong Q1
Earnings Outperformance, Resilient Commodity Price Strength, Abating Inflation Dynamics and
Lower Funding Costs; Recent Underperformance Driven by US $ Strength to Prove Short-lived
The past several weeks have offered a number of confirming fundamental developments reinforcing our standing
investment thesis calling for a period of sustained return outperformance by EM equities versus their developed
market (DM) peers. Said developments include the following:

Solid earnings outperformance by EM companies of their DM peers in the first quarter of the year.
Specifically, EM Q1 EPS contraction proved far lower (around 4 percent on a year-on-year basis) than those
recorded by peers in the USA (8 percent year-on-year contraction), Europe (13 percent year-on-year
contraction) and Japan (18 percent year-on-year contraction), according to information tallied by JPMorgan
strategists. At a macro level, EM economies’ strengthened cyclical stance versus DM peers as illustrated in
the sustained improvement in high frequency economic readings such as economic surprise index - Figure
10.
-7-
Figure 10. EM Economies’ Economic Surprise Momentum versus Major Economies: Sustained Uptrend
Despite Recent Moderation
80
70
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
Citi Economic Surprise Index Difference between Emerging Markets and US
Source: Citigroup Global Markets

Resilience of terms of trade facing a large number of EM economies, including those in the much adversely
impacted commodities space (e.g. Brazil, Indonesia, Russia, among others), as the powerful year-to-date
recovery in commodity prices has been sustained over the past several weeks despite a sharp counter-trend
bounce in the US Dollar (Figure 11)
Figure 11. Commodity Price Recovery Proves Resilient in May Despite Powerful Counter-trend Bounce in
the US Dollar Index
250
91
240
92
230
93
220
94
210
95
200
96
190
97
180
98
170
99
160
100
150
101
TR/CoreCommodity CRB Commodity Index (LHS)
Source: Bloomberg
USD Index (RHS,INV)
-8-

Abating inflation momentum across a number of large Emerging Market economies at a juncture in which
the balance of payments position continues to heal even for a number of fragile economies (e.g. Brazil,
whose April monthly current account balance swung into surplus following 83 months of protracted deficit
readings). Such developments herald an environment in which local interest rates are likely to come down
over the coming months as has indeed begun to be the case, as highlighted by the following list of EM
countries whose central banks have implemented policy rate cuts thus far in 2016: China, India, Indonesia,
Turkey and Hungary.

Continued reduction in EM economies’ and corporates’ debt cost of capital thus far in 2016, lending further
support to EM equities valuation (Figure 12).
Figure 12. EM Corporates’ and Sovereigns’ Debt Spreads Remain at Considerably Lower Levels in 2016
versus 2015 Year-End Levels, Lending Support to EM Equity Valuations
550
6.8
530
6.6
510
6.4
490
6.2
470
6
450
5.8
430
5.6
410
5.4
390
5.2
370
5
350
4.8
J.P. Morgan EMBI Global Spread Index (LHS)
Credit Suisse Emerging Market Corporate Bond Total Yield (RHS)
Source: J.P. Morgan and Credit Suisse
Given the above cyclical considerations highlighting EM equities’ much improved stance versus DM peers at a
juncture in which the valuation case in favor of EM equities versus DM peers remains exceedingly compelling (Figure
13), Glovista’s investment team strongly believes that the recent pullback in EM equities’ relative return
performance versus DM fueled by the bounce in the US Dollar index provides an highly attractive entry point for
global asset allocators to raise exposure to the EM equities asset class.
-9-
Figure 13. EM Equities’ P/CE Valuation Discount versus DM Peers at Close to Multi-year Low Levels
115
110
105
100
95
90
85
80
75
70
65
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
MSCI EM Price to Cash Earnings Relative to MSCI World
Source: MSCI, Bloomberg and Glovista Calculations
Finally, over the past several weeks we have implemented a number of country- and sector-level rebalancing actions
on the back of shifts in fundamental sector earnings and valuation dynamics as well as the incipient counter-trend rally
in the US Dollar. These include reducing our allocations to Russia, India, Malaysia, China technology sector and Turkey
while increasing allocations to Taiwan, China and Chile.
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sell or solicitation to buy, purchase or subscribe to any securities.
2. This document is for general information of Glovista clients. However, Glovista will not treat every recipient as client by
virtue of their receiving this report.
3. This newsletter does not constitute a personal recommendation or take into account the particular investment objectives,
financial situations, or needs of individual clients. The securities discussed in this document may not be suitable for all
investors.
4. The price and value of investments referred to in this newsletter and the income arising from them are subject to market
risks. Past performance is not a guide for future performance
5. Certain transactions including those involving futures, options, and other derivatives as well as non-investment grade
securities give rise to substantial risk and are not suitable for all investors. Please ensure that you have read and
understood the current risk disclosure documents before entering into any derivative transactions.
6. This newsletter has been prepared by Glovista based upon publicly available information and sources, believed to be
reliable. Though utmost care has been taken to ensure its accuracy, no representation or warranty, express or implied, is
made that it is accurate or complete.
7. The opinions expressed in this newsletter are subject to change without notice and Glovista is under no obligation to
inform the clients when opinions or information in this report changes.
8. This newsletter or information contained herein does not constitute or purport to constitute investment advice and should
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9. Forward-looking statements in this newsletter are not predictions and may be subject to change without notice. Neither
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