Research & Insight

Like the ten thousand men of the Grand old Duke of York, markets marched up the hill in October only to be marched back down again in November. The MSCI EM fell 6.7% as hopes for a swift resolution to Greece’s debt problems morphed into worries about Italy’s larger debt overhang. In addition, economic indicators have been showing a slowing trend in growth across the world, stoking fears of a new global recession.

MSCI Asia ex Japan gave up a significant proportion of the previous month’s gains this month, falling 8.3%. Europe was again the key cause for concerns but risks in the other large economies remain with attention this month on the failure of the US Congress super committee to make progress on US deficit reduction. China hard-landing fears continue though increasingly, there is the view that the worse it gets – the more likely a positive policy response. A 50 bps cut in Reserve Requirement Ratio in tandem with other liquidity supportive measures by other major central banks helped lift markets at the very end of the month.

Investors definitely needed hard hats and strong stomachs during the third quarter. MSCI EM Index fell 22.46% over three months and underperformed the World index by some 6%. Investor sentiment was battered by a trilogy of worries – Euro sovereign debt, slowing Chinese economic growth and fears of a second US recession. After a weak August, falls in emerging markets were exacerbated in September by a flight to the perceived safety of the US Dollar - the resulting outflows of capital led to emerging market currencies falling by -7.8% against the USD, including some dramatic moves in the Brazilian Real (-15.5%) and South African Rand (-13.7%) over the month.

MSCI Asia ex Japan fell sharply, down 20.9% for the quarter. Starting with fears over political impasse in the US, this rolled into escalating concerns over European policy paralysis and then into China hard landing prospects. This mix has been a potent negative for our markets with all of them falling meaningfully. China (-22.9%) led the way down, but in general, open and liquid markets fared amongst the worst (Korea, Taiwan, Hong Kong) while the smaller Asean markets (Indonesia and The Philippines) fared relatively better.

Thailand is suffering with the worst flooding in 50 years, which has already displaced over 2 million people, killing nearly 300. There is no sign of let up and the country is bracing itself for worse. While 30 of Thailand’s 77 provinces have been severely affected, Bangkok is now bracing itself, as floods from over-spilling dams in the north of the country are expected to affect the city in the coming days. 15% of farmland is affected and evacuation centres around the country are being set up. The government has started to bolster Bangkok’s flood defences.