The CIO office’s view of the week ahead.September 15 marked the 10th anniversary of Lehman Brothers’ filing for Chapter 11 bankruptcy protection. Since Lehman’s collapse has come to symbolise a massive financial crisis whose consequences continue to be felt, it is natural for this anniversary to be the occasion for speculation on when and where the next large-scale crisis might occur.Emerging markets (EM) are the weakest link in the eyes of some, even though contagion has been limited to the likes of Turkey and Argentina, and even though EM assets tried to stage a fight back last week, helped by rate increases in Turkey and Russia. But worries are far over. The Brazilian elections next month will soon further test the nerves of EM investors, for example, making us cautious about changing
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The CIO office’s view of the week ahead.
September 15 marked the 10th anniversary of Lehman Brothers’ filing for Chapter 11 bankruptcy protection. Since Lehman’s collapse has come to symbolise a massive financial crisis whose consequences continue to be felt, it is natural for this anniversary to be the occasion for speculation on when and where the next large-scale crisis might occur.
Emerging markets (EM) are the weakest link in the eyes of some, even though contagion has been limited to the likes of Turkey and Argentina, and even though EM assets tried to stage a fight back last week, helped by rate increases in Turkey and Russia. But worries are far over. The Brazilian elections next month will soon further test the nerves of EM investors, for example, making us cautious about changing our underweighting of EM equities. Indeed, pessimism was the dominant feeling among people I met during my Asian trip last week. While Asian markets have generally suffered less than their Latin American counterparts, and while Asian currencies are being supported by the People’s Bank of China efforts to prevent excessive weakening of the renminbi, there are grounds for being cautious. Momentum in the highly indebted Chinese economy has been slowing, rising US yields and trade conflicts remain unresolved. In spite of last week’s comeback, the MSCI AC Asia (ex Japan) index is still down over 7% year to date (in US dollars).
We are not unduly worried about Asia yet. With some exceptions, countries run current account surpluses and have strong forex reserves, while US dollar reliance has dropped since the 1997 Asian crisis. But we continue to prefer Japan and we are waiting for poor data, further escalation of trade tensions and downward earnings revisions to lead to investor capitulation before making any substantial move to buy into other areas of Asia.
César Pérez Ruiz, Head of Investments & CIO