Global Emerging Markets - Monthly Commentary
Posted on 16 December 2010
November, 2010
Market review
November started well with markets continuing their upward march from a strong September and October. Markets then turned south to finish the month down -2.64% (MSCI EM) as worries over tightening in China and major concerns over the continuing viability of the Eurozone as an economic entity surfaced. The Eurozone woes were borne out of the very poor fiscal situations in the European ‘PIIGS’ which were highlighted by the bailout in Ireland. Adding to the noise, tensions between North and South Korea escalated with an exchange of artillery. The Korean market largely shrugged off these events with a meagre gain of 0.04%.
In China (-2.4%) various October macro indicators confirmed that the economy’s growth momentum is continuing into Q4, having improved steadily since Q3. October CPI was higher than expected coming in at 4.4% yoy on the back of rising food and vegetable prices and thus, the PBOC hiked the RRR by 50bps twice in November. Concerns in India (-6.5%) centred on two scandals related to the awarding of telecom licenses and collusion between property developers and banks.
After a recent period of strong outperformance, several of the smaller markets gave back some gains with 13% falls in Colombia and the Philippines and a 10% fall in Turkey. Hungary fell 20% as worries over its fiscal position continued (the strategy has no exposure to Hungary). Mexico and Taiwan take the laurels for best performing markets with gains for the month of 1.95% and 1.58%. Both markets are exposed to the US economy via manufacturing and technology exports.
Market outlook
November marked a relatively mild correction, despite Eurozone worries and monetary policy tightening in China. Buttressing positive sentiment are ongoing economic releases that point to continued strong growth in the emerging world, a strong Germany and signs of more positive data from the US.
Our stance remains unchanged - we continue to believe that markets will ride this wall of worry. Recovery from the crisis continues, but the western developed markets are doing so slowly and at slower anticipated rates of growth than emerging markets. Several emerging markets are showing signs of inflationary pressure, a direct result of above trend growth – China and Brazil have both recently tightened reserve requirements to drain liquidity from their financial systems and both countries have embarked on policies of raising interest rates. We anticipate that both these countries should be able to engineer relatively soft landings. With developed economies still recovering slowly, monetary policy in these countries will continue to be kept very loose, in turn encouraging liquidity to look for growth opportunities. Meanwhile, emerging equities continue to look attractive alongside developed markets due to similar valuations with better growth prospects, superior balance sheets and undervalued currencies.
Flows into both emerging market equities and debt remain extremely strong – year to date inflows into dedicated emerging market equity funds have now hit $90bn, a new record. In terms of flows, we (and most observers) anticipate continued movement to emerging equity and debt in 2011.
Strategy
The strategy is overweight Russia, India and Turkey, funded by under weights in South Africa and Taiwan. The strategy is overweight the consumer discretionary sector and underweight consumer staples.
In keeping with our core philosophy, we are seeking to maintain a fully invested, fully diversified exposure to the asset class. This does not mean we are looking to take risk out of the strategy, rather that we are trying to diversify that risk by country and sector.
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