Research & Insight

The benchmark returned a small positive in US dollars in the final quarter of 2011 with risk assets bouncing back from large falls in value in September. Rexiter’s local currency emerging market debt portfolio has performed strongly over the last three months generating positive alpha in each. Both country and security selection contributed positively to these strong relative returns with Eastern Europe and Latin America the top performing regions.

Despite a reasonable bounce of 4.5% in the final quarter, 2011 was a poor year for emerging markets. The 18.2% decline was not only one of the weakest years for the asset class but also only the second time since 2000 that emerging equities underperformed developed markets.

MSCI Asia ex Japan eked out a modest gain of 0.59% in the fourth quarter though finished the year -17.3%, the second weakest performance in a decade. It was another volatile quarter dominated by Europe and near term newsflows. All of the gains were made in October (up 12%) and were pared away for the remainder of the period as confidence in Europe overrode more positive data from the US and even China which signalled a start to policy easing with a Required Reserve Ratio cut in late November.

Is something more rotten than usual in the embalmed state that is the Kimdom of the Democratic People’s Republic of Korea (DPRK)? There is plenty on which to speculate, and the potential cast of characters is greater than it may initially seem.

North Korea announced at noon Seoul time yesterday that its leader Kim Jong Il, the Dear leader, had passed away of ‘exhaustion’ while on a domestic train trip on December 17. A flavour of North Korea can be garnered from the fact the state television announcer wept as they read the news, while thousands in the main square in Pyongyang chanted in unison and waved ‘Kimjongilia’, a flower named after the deceased leader. The son of Kim Il Sung (the Great Leader), Kim ruled North Korea for 17 years after coming to power in July 1994. The South Korean army and government were put on full alert and developments will be closely watched worldwide. Given the uncertainty it will unquestionably cause the market, the impact is clearly negative, at least in the short term. Having said that, history tells us not to panic. The most recent ‘flare ups’ were the North Korean torpedo attacks on a South Korean warship on 26 March 2010 (killing 46 sailors) and the firing of artillery shells on Yeonpyeong Island on 23rd November 2010 (killing 2 soldiers and 2 civilians). In both cases, the market digested concerns and regained pre-accident levels within a week. Post the announcement on Monday the Kospi index lost 3.4%, but regained some of that today. The Korean Won fell 1.6% to a 2 month low of 1177 per dollar but regained all of that today.