With the upcoming presidential elections spreading uncertainty in the US and a web of bureaucracy and political uncertainty dominating Europe, we are seeing a large inflow into emerging markets.
Read the transcript of this video below.
The US Markets
When we talk about markets at the moment the first thought goes to the US, which is the dominant and largest market. The US still has a lot of problems. The main problem really is the presidential elections coming up. The two candidates have totally divergent views that will lead to totally different policies. This creates uncertainty. Having said that, the US economy is still expanding and growing and is, in fact, close to capacity. The biggest underlying problem is that the cycle has been going on for too long. We can see that in the unemployment rate, which is at record lows. For investors, the problem is whether there is enough momentum and strength behind the recovery that is taking place that will enable economic growth in the US to continue for another one or two years, or whether we are reaching a point where the Fed won’t be able to hike interest rates because the cycle is unraveling. That is where the presidential election comes in, because it causes uncertainty just when we don’t need it.
And what about Europe?
Europe is still trapped in a mess of bureaucracy and political uncertainty and the upcoming elections and referendums in Italy, Germany and France don’t help at all. The Italian banking problem and now the Deutsche Bank problem both highlight what’s happening – an inability to make decisions, structural problems from within Europe, and uncertainty going forward. So Europe is not really attracting new investment.
Opportunities in emerging markets
Having described what is happening in Europe and the US you can understand why a lot of money is flowing to emerging markets. Emerging market currencies fell significantly from 2012 to 2015 so they are undervalued in that regard. Structurally, emerging markets have much stronger growth rates and that’s because of strong banking systems, growth-orientated policies and a lot of dynamic policy-making via the governments. We can therefore see how emerging markets have started to outperform.
Looking at our portfolios in terms of what we’ve done, we always believe a bottom-up approach is much better than a macro-driven approach. Macro policies are difficult to forecast; therefore, we focus on individual companies. Having said that, we do find that in the financial sector we find the best value simply because it is unloved and investors have fled the sector and emerging markets. As an example, our financial fund is up 10% year-to-date and has outperformed the MSCI World Index, and our emerging markets fund is up 30% year-to-date. This shows that by focusing on unloved companies but still being macro-aware to some extent will add value.