August 2018 - Emerging Markets Continue Their Slide - Systematic Fund Manager's Comments

16 September 2018

RAM Systematic Fund

European Equities

Emerging Markets Equities

Emerging Markets Core Equities

North American Equities

Global Shareholder Yield Equities

Long /Short European Equities Fund

Long/Short Emerging Markets Equities

Long/Short Global Equities 


Emerging Markets Continue Their Slide

Rising macro uncertainty, higher interest rates and a strengthening US dollar have led to a modest tightening of global financial conditions. This has laid bare vulnerabilities that had, until recently, been masked by plentiful global liquidity. Amid this backdrop, global stocks trended downwards while emerging markets fell precipitously as uncertainty over the outlook for global trade and the situation in Turkey made for an uneasy month. August also witnessed the return of both risk aversion and volatility as the divergence in performance between developed and emerging markets became increasingly stark.

Turkey set the tone for emerging markets in August, with EM equities lagging broader markets (see below). Turkey’s woes were in stark contrast to those in the US; with the Nasdaq crossing the 8,000 milestone. The technology-heavy index has continued to enjoy a relatively surreal year thus far, despite the spectre of the on-going trade war between the US and some emerging markets including Turkey and China.

Turkey’s Troubles

Turkey has been under serious pressure in August, with the domestic inflation rate rising to 17.9% and the lira also suffered its biggest monthly drop since February 2001. Following the increasing pressure on Turkey’s economy, RAM readjusted its exposure in the model from 5% to 2.2%.  While the situation in Turkey here is serious, it is solvable. To reverse course, at least in the short term, the government would need to adopt fiscal discipline and allow the Central Bank to raise rates decisively. The long-term solution is trickier to implement, requiring harder work and would necessitate structural reform of fiscal consolidation. So far risks of severe contagion to the euro zone or other emerging markets appear limited, as Turkey's vulnerabilities appear country-specific. Despite a difficult period for Emerging Markets, we can expect to observe a similar situation to what occurred in May; amid the turmoil (higher volatility leading to higher dispersion) opportunities persist for fundamentally-focused stock pickers.

Chart of the Month

Against this background of rising uncertainty, we believe there is still a strong case for investing in EM equities, but selectivity and diversification is key. We’re at the point where we are at the lowest valuation levels since 2016, perhaps offering investors a good entry point into the asset class.

Sources : RAM Active Investments & Bloomberg
(dates: 09.30.2008 to 31.08.2018)