Research & Insight

Argentina’s recent primary elections held on August 14th saw President Cristina Fernández de Kirchner garner just over 50% of the votes cast. This vote was a first for the country after election reforms passed last year mandated that candidates for the Executive and Legislative branches be selected through primaries. However, with each party putting forth a single candidate and voters not restricted across party lines, the process was in essence a federally mandated poll. In this sense it should give a reasonably good indication of what to expect in October’s elections. With the President easily surpassing the 45% level needed to avoid a run-off, in our view we expect government policy to be basically more of the same going into 2012. From a markets standpoint, this means that Argentina becomes increasingly vulnerable to weak external conditions and returns in peso denominated sovereign bonds are likely to be muted.

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.

Local currency emerging market debt continues to be in demand internationally with flows strong and impressive performance. Asia led the way in July with strong returns across all four benchmark countries. Foreign exchange appreciation continues to be the dominant driver of these returns.

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%).