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Daily Agenda: Oil Rises on IEA Projections

IEA expects oil production to drop later in year; Brazil’s president impeached and suspended; Nissan buying stake in Mitsubishi.

Oil futures and currencies strongly linked to crude prices rose in early trading on Thursday, one day after a fresh report from the International Energy Agency. While in the near-term, the Paris-based body said Iranian production increases had offset fire-related supply disruptions in Canada, the report outlined the case for lower supply levels in the second half of 2016. The projections followed a release by the U.S. Energy Information Administration on the same day that indicated crude inventories in the U.S. declined my nearly 2.5 million barrels last week. For oil bulls, the glass-half-full argument continues to pick up steam,

Dilma impeached. After a 21-hour senate session, a majority of Brazilian senators voted to impeach and suspend President Dilma Rousseff, forcing her to step aside in favor of Vice President Michel Temer. Rouseff will now face a trial on the impeachment charges, mostly centering around accounting practices seemingly designed to mask the deficit; she will be permanently removed from office if convicted. Spokespeople for Temer, who leads a different party than Rousseff, indicated that economic recovery will be the primary focus of his administration. Organized labor groups have pledged to stage strikes in support of Rousseff.

Blackstone pulls back from consumer lending. According to unnamed sources in a story published by Bloomberg Thursday, New York’s Blackstone Group will be tapering its online consumer-lending activities through its Blackstone’s B2R Finance division. The announcement comes during the same week that LendingClub announced the departure of its CEO over potential improprieties and, separately, a report by the Treasury Department that recommended stronger regulatory oversight for the industry segment.

Nissan takes Mitsubishi stake. On Thursday Nissan Motor announced that it has agreed to acquire 34 percent in troubled Mitsubishi Motors Corp., as the smaller firm seeks to recover from fallout over falsified performance ratings. The deal, valued at $2.2 billion, comes after Mitsubishi had conducted negotiations with other possible suitors, including Chinese automaker BAIC Motor Corp.

BOE projects lower growth. On Thursday, policymakers at the Bank of England as expected announced no change in benchmark lending rates but reduced growth forecasts as concerns over the effect of a potential departure from the European Union remain high on economists’ list of concerns. Estimates for second quarter growth in the U.K. were lowered to an annualized 0.3 percent from a prior 0.5 percent by the central bank’s economists, bringing full-year 2016 predictions down to 2 percent.

Portfolio Perspective: EM Represents Most Appealing Growth Opportunity for Those Who Can Stomach Volatility Michael Mullaney, Fiduciary Trust Co.

It’s too early to say that the worst is over for emerging-markets (EM) stocks, and last year—thanks to a challenging stretch for commodities and currency headwinds triggered by a strong dollar — was certainly no treat for investors. Recently, though, many have started to return to emerging markets, which we believe actually represents one of the most appealing destinations for long-term growth. That being said, it won’t be without some heartache along the way, which is why we espouse a Rip Van Winkle approach when it comes to investing in EM —employ a long-term strategy, but investors should do their best to sleep through, or at least ignore, the ups and downs that will characterize the frontier markets over the next decade.

We see three primary catalysts that should drive outperformance for emerging markets. First, if history serves as a guide, valuations are appealing. Even with the recent run up in certain key emerging markets, relative valuations haven’t been this attractive since EM stocks traded at a 20 percent discount to equities in the developed markets during the global financial crisis.

The second catalyst relates back to the investor sentiment, which while improving, remains circumspect given the volatility inherent to the segment. Cumulative flows into emerging market funds are only recently coming off of six-year lows, as money has started to rotate back into this segment given the dearth of growth opportunities available in other areas. A rising rate environment in the U.S. and little room left for cuts in Europe and Japan make EM stocks even more attractive on a relative basis and with cumulative flows near a trough, risk is skewed to the upside.

Finally, as the advantage shifts to developing East Asia and the Pacific, new industries are emerging and the corporate landscape is evolving, buttressing the long-term growth story for EM stocks. And that makes the mismatch between the emerging markets’ share of the global economy, and the total market capitalization of emerging market stocks all the more glaring. Emerging markets currently account for 39 percent of the world’s aggregate gross domestic product in U.S. dollar terms, according to the International Monetary Fund. Yet EM stocks represent only 12 percent of the total market capitalization of the global stock market.

That’s a statistic, assuming investors adopt the Rip Van Winkle approach, that should change dramatically by the time the rest of the market wakes up to the opportunity.

Michael Mullaney is chief investment officer at Fiduciary Trust Co. in Boston.

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