This week’s issue of Fund Strategy attempts to deal with two of the biggest questions being asked in global economics at present – just what is happening in the US and global emerging markets?
The image used to illustrate this week’s main feature by Rodrigo Amaral (see page 12) is a powerful one. Taken of the protests in Turkey, it is illustrative of the sheer amount of social unrest across several emerging markets at present and serves as a reminder of the risks involved in investing in the region.
Investors have been taking note. Weak data coming out of China, allied to uncertainty regarding US monetary policy, has fuelled a flight from the emerging market region, which year-to-date is significantly underperforming its developed world counterparts.
Rathbones Global Opportunities fund manager James Thomson has actually increased his portfolio’s exposure to the US to a record high after arguing the Chinese slowdown could be “a gift” to it. He argues a slowing China means slower demand for commodities, which creates falling inflation and a strengthening dollar, which all provide a boost to US valuations.
Since the turn of the year to 30 June, whereas the S&P 500 has returned 21.99 per cent in sterling terms, the MSCI Emerging Markets index is down 3.08 per cent. As Amaral notes, talk regarding the extent to which the main axis of the global economy was shifting from the developed world to the likes of the Bric countries has quickly been replaced by the acknowledgement of structural deficiencies in the Chinese credit sector and the frailty of emerging currencies.
But what of the deficiencies in the world’s largest economy? The Bureau of Economic Analysis recently revised down its estimate for first quarter US GDP growth, yet, rather than take this badly, the S&P 500 rallied.
The reason? There now seems to be a perverse situation where markets like poor economic data to be coming out of the US as it could delay tapering by the Federal Reserve. Vice versa, any good news is taken badly owing to the market’s perception that this raises the prospect of the winding down of quantitative easing.
In this month’s Fund Strategy Investment Committee (see page 10) our panellists, who are joined by Neptune’s chief economist James Dowey, attempt to get to grips with these conundrums and put them into perspective as to what it means when it comes to investing in the US.