Global markets have not been this polarized since the Great Recession - here's Bank of America's game plan to find the strongest winners
- US equities are outperforming non-US risk assets to a degree that hasn't been seen since the financial crisis, according to Bank of America Merrill Lynch.
- The key question investors need to answer is whether this is a buying opportunity, implying that global growth would continue and help emerging markets rebound.
- The cross-asset investing team recommended some trades that would benefit from a recovery in risk assets and yet hedge against slower growth.
US markets are headed in the opposite direction to the rest of the world.
Last week, US stocks extended their recovery from the correction in February and powered to new highs. Strong second-quarter earnings were powerful enough to make this the longest-running bull market - a feat which was confirmed on Friday, August 23, when the S&P 500 closed above its January high of 2,872.87.
However, emerging-market stocks and other risky assets are still stuck in a rut.
The S&P 500 has gained 8.6% this year, but the MSCI Emerging Markets index has slumped by almost the same magnitude (-8.7%).
The pain in emerging markets has not been limited to equities. Turkey's lira, which lost more than one-third of its value in August, is perhaps the poster child of a sell-off in EM currencies that's was partly triggered by higher US interest rates. And right on cue, the emerging-markets carry trade, in which investors borrowed in US dollars to invest in foreign places with higher interest rates, has also fallen sharply. ...
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