Research & Insight

The phrase “every cloud has a silver lining” can be traced way back to 1634 to John Milton’s masque “Comus”. Over 350 years later, as the global economy struggles to emerge from the deepest recession since World War II, silver linings are in short supply for investors. Investment portfolio values have been severely impaired by a decade of stagnant equity prices and pension shortfalls are now the rule rather than exception. Therefore, many investors now need to invest in assets that generate a higher return than their benchmark. With paltry global interest rates and inflationary fears fuelling growing concerns over the future direction of bond prices, asset allocation has never been more difficult.

MSCI Asia ex Japan rose by 0.5% in February in a relatively quiet month with the Lunar New Year half way through as the world’s primary concerns centred on the Greek debt issue. The market was weaker in the earlier part of the month on this euro debt issue and partly on China tightening concerns, but recovered its poise in the latter period on favourable economic data and expectations of renminbi appreciation.

Markets lacked direction during February as investors continued to weigh up the consequences of potential sovereign default risks emerging in Europe and a slowing Chinese economy against a backdrop of generally better than expected 4Q2009 corporate earnings. After an initial sell off earlier in the month (down 4.5% during the first week of the month), the MSCI Global Emerging Markets index finished February slightly up (+0.35%). The dollar was the key negative driver in February, rising 1.1% on higher risk aversion. This overwhelmed the normal positive impulse to emerging market equities from the 3.5% advance in commodity prices, an 8.6% jump in oil prices and lower EMBI spreads, down 13bp.

Turkish security forces have recently arrested almost 50 people as a result of revelations about an alleged plan, codenamed “Sledgehammer”, for a coup against the ruling AK party in 2003. Amongst those detained were the former heads of the Navy and Air Force, 15 ex-Generals and 32 incumbent officers. Last year another sweep rounded up over 200 people, including military personnel, lawyers, journalists and politicians in the Ergenekon conspiracy, also aimed against the AKP. The prominence of the people arrested and the scale of the operations reveals just how hard the fight between the secularists (who regard themselves as the preservers of the “legacy of Ataturk”) and the more populist and Islamic leaning ruling power is.

Following a reasonably positive start to the year, equity markets saw some profit taking to finish January lower. The MSCI Emerging Market index fell 5.6% vs. a 4.4% fall for AC World. Equities were hurt by concerns about Chinese monetary tightening, US banks over-regulation and by the increased risk of Greek debt default. Macro drivers turned negative: commodity prices were down 6% (as per the CRB Jefferies Commodity Index), oil prices fell 7%, EMBI spreads rose 30bp and the USD was up 2% (as per the DXY Dollar Index).