The CIO office’s view of the week ahead.Last week market volatility was driven by news headlines, rather than fundamentals. This was particularly evident in emerging markets (EM), which continued to underperform despite the stabilisation of the Turkish lira. Chinese internet company Tencent piqued investor nervousness after reporting disappointing Q2 results, against a broader backdrop of concern around slowing Chinese economic growth and technology stocks’ growth prospects. While the Chinese economy has been decelerating this year, this has been primarily driven by the government’s deleveraging efforts, which are a net positive for long-term economic stability. Elsewhere in EM, Brazil’s presidential campaign kicked-off on Thursday, with uncertainty around the outcome driving the
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The CIO office’s view of the week ahead.
Last week market volatility was driven by news headlines, rather than fundamentals. This was particularly evident in emerging markets (EM), which continued to underperform despite the stabilisation of the Turkish lira. Chinese internet company Tencent piqued investor nervousness after reporting disappointing Q2 results, against a broader backdrop of concern around slowing Chinese economic growth and technology stocks’ growth prospects. While the Chinese economy has been decelerating this year, this has been primarily driven by the government’s deleveraging efforts, which are a net positive for long-term economic stability. Elsewhere in EM, Brazil’s presidential campaign kicked-off on Thursday, with uncertainty around the outcome driving the Brazilian real close to its weakest point against the USD this year. We are avoiding EM until we have more clarity on this front.
News around Turkey continued to dominate investors’ attention, weighing further on shares of European banks. However, this is in greater part attributable to negative sentiment than to actual exposure. While peripheral Eurozone banks are among Turkey’s largest creditors, their exposure relative to capital is not big enough to trigger a systemic problem. Even the worst case scenario would hurt the banks’ shareholders, but not threaten their solvency nor require outside intervention. In regard to Turkish exposure, we believe the market is selling before looking at the numbers. However, European banks have been derating since the beginning of the year and are carrying the additional stress burden of Italy.
Italian bonds have been driven lower as markets price in potential trouble ahead of budget negotiations with Brussels in October. Elsewhere, EM countries like Turkey and South Africa, who have benefitted from high growth fuelled by cheap financing costs in recent years are proving particularly vulnerable today, especially those with USD debt exposure as the US continues its rate raising cycle. These are areas we will continue to monitor closely and in the meantime, we remain negative on periphery bonds.
César Pérez Ruiz, Head of Investments & CIO