Last week was not a good one for equity investors. The ongoing – or, in fact, escalating - worries about trade wars saw pretty much every market slide back. Sentiment seems increasingly fragile and, despite what is still a reasonable economic backdrop, there seems little appetite for any risky assets at the moment.
Emerging markets in the spotlight
Emerging markets, as we have discussed before, have been well and truly in the spotlight. In addition to trade, concerns are building over weaker economic growth in emerging Asia – especially China – and a swathe of interest rate rises. Both Turkey and Argentina look set for deep recessions and South Africa is still dealing with weakness in both its economy and the rand. It’s pretty tough to find good news – perhaps the expectations for further solid growth in India?
We have been monitoring emerging markets closely. We are still baffled by the use of phrases such as 'contagion'. It implies that these markets are a homogenous asset class when they are – especially in the case of smaller ‘frontier’ markets – really more of an opportunity set. But that doesn’t matter. At the moment perception is reality and they are going to struggle. The key question is what do we do about them? Stick or twist?
We see emerging and frontier markets as key strategic positions for us. We have invested there in the full expectation that there will be difficult and volatile times. Our decision is, therefore, a tough one. We want to mitigate against further falls but we also think some markets – Vietnam being a good example – have been overly punished and we are reluctant to sell out at these levels. The exception is Russia.
Moving out of Russia
We have longer term concerns about further sanctions against Russia and, despite the clear attractions of such cheap equity valuations, we are going to cut back. This is a hard decision to make but with no clarity about the future for Russian equities it is clear to us that our responsibility is not to gamble with our clients’ money but to reassign it elsewhere. That reinvestment is now the subject of our consideration and we are in no hurry to make a rushed or speculative decision about it.
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