Research & Insight

South Africans don’t need much of an excuse for a party and as next January marks the one hundredth anniversary of the founding of the ruling African National Congress (ANC), the Capes’ vineyards are certain to be doing great business come 2012. However, although it is now seventeen years since Mandela’s historic election victory in 1994, not all South Africans will be drinking hard to celebrate. Over half of the country’s youth remain unemployed, their futures bleak, and there is a growing sense that black empowerment is an ideology now abused to help the privileged few rather than the impoverished many.

It has been a tumultuous couple of weeks in global markets - similar in nature, direction and volatility to 2008. Global emerging markets had fallen 12.88% and Asian ex Japan markets 12.05% as at 11th August. US treasury yields have fallen close to 2008 lows and there has been a sharp rise in prices of gold, the Swiss Franc and the Yen. What changed? Clearly this is open to interpretation, but first and foremost, our answer is that markets don’t like uncertainty and there remain huge uncertainties as to the ability of Europe and the US to deal with their debt problems and maintain a reasonable level of growth at the same time. The main point from an emerging markets perspective is that the falls in the emerging markets are again being caused by a global macro-economic issue. This is a continuation of the so called “risk on, risk off” environment. Unfortunately these issues are likely to result in lower growth in the West which will have some real effect on emerging markets. However, Asian and emerging economies, and hopefully their stock markets, are better placed than most to handle the consequences of slower growth and, just as during the last global crisis, we would expect them to be the first to recover once conditions stabilise.

Markets have been particularly weak in early August, for reasons that have been well documented. We thought it would be helpful to provide a brief summary of how we are reacting to these events, outlining the changes we have made to the portfolio.

July was the calm before the August storm. The MSCI EM fell by just 0.38%. Most markets actually fell more than that average – declines of 3 or 4% were quite common, but the average was boosted by positive returns from Thailand (+11.6%), Peru (+8.4%) and Indonesia (+7.3%).

MSCI Asia ex Japan rose 1.15% during July, but this was the calm before the storm in August. Our markets continued to take their cue from developed markets, namely Congress’ impasse over the extension of the US debt ceiling and the debacle in Europe spreading to Italy and Spain. It is not surprising therefore that the outperformers were once again the smaller, more insulated Asean markets of Thailand (11.6% buoyed by a decisive election outcome), Indonesia (7.2%) and the Philippines (6.7%).