• Written by 

    Solomon Soquar, Q4 2015

  • 12/10/2015

“Few things are brought to a successful issue by impetuous desire, but most by calm and prudent forethought.”
(Thucydides, Greek Historian, 460-395 BC)

The butterfly effect 2 of 9 Compass Q4 2015

Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

Emerging markets represent half of the global economy in recent times, contributing as much as eighty percent of the world’s growth with a financial system interconnected with the rest of the world. As engines of this growth, companies in the developing world have accrued significant levels of US dollar denominated debt. Expectations of a US rate rise have caused a sharp appreciation in the value of the dollar, posing a threat to the ability of these businesses to meet their obligations. Olivier Asselin, Head of Specialist Investment Management, and Daniel Forbes-Ford, consider this threat as they review the case for investing in the emerging markets, debating whether recent volatility has presented an attractive entry point for investors or has acted as a trigger to adopting a more cautious approach.

Despite their obvious importance in the global economy, the emerging markets are not a primary responsibility for the US Federal Reserve (Fed). Of perhaps greater importance is the Fed’s ability to re-arm its interest rate arsenal in advance of a cyclical downturn. The recent deceleration in Chinese growth has caused severe falls in commodity and energy prices resulting in the sharp depreciation of a number of emerging markets currencies. The recent and unexpected devaluation of the Chinese yuan for example – an attempt to stimulate exports – suggests that the country’s official growth rate may not be quite what it seems. William Hobbs, Head of Investment Strategy, UK & Europe, shares his thoughts on the recent economic slowdown in China and the potential ramifications across the wider emerging and developed markets. Philip Niem, Head of Asia Discretionary Portfolio Management, drills down into the MSCI China Index to better understand which sectors of the market are delivering high or improving earnings growth despite the weakness in the economy.

The recent decision by the Fed to keep rates on hold has taken a number of commentators and investors by surprise.

The recent decision by the Fed to keep rates on hold has taken a number of commentators and investors by surprise. Whilst the decision to postpone is likely to further exacerbate the ongoing uncertainty over the pace and timing of subsequent rate rises, perhaps it has given the emerging markets some much needed breathing space. It is uncertain how the emerging markets will react to the inevitable first step towards monetary policy normalisation. In this issue, Jaime Arguello, Head of Multi Manager, and Chady Jouni, reflect on how the reversal of some of the monetary policies of the post-crisis period could present a renewed vulnerability for the emerging markets.

Determining the right investment to make today is tough. As much as we strive to be logical and dispassionate in our choices, every decision we make is influenced by emotional responses to stuff that matters less than we think it does. Greg Davies, Head of Behavioural Finance, explores how investment decisions made in periods of calm reflection can make for a better investor in the long run – a sentiment perhaps shared by Janet Yellen, and Thucydides.

As always, we hope you enjoy this edition of Compass and we welcome any thoughts or comments on its contents.