The S&P 500 is a good proxy for world markets and it has been trading in a narrow range with the advance/decline ratio moving the wrong way (declining stocks outnumbering advancing ones) and a smaller sub-section of stocks reaching new 52-week lows.
The most recent news from a variety of emerging markets (EM) has not really ‘deteriorated’ per se: Ukraine has been a rolling multi-week problem; this is not the first time that Venezuela has devalued its currency; Argentina has been lurching between political crises for a few years now; and China has been talking about cracking down on corruption for the past year. But taken together, we could argue that these events evidence signs of stress in EM, and they have been building for quite some time.
We continue to believe that the worst is yet to come in EM. Credit provision is extended in many geographies (above trend), current account deficits are negative and widening. Add to this the end of quantitative easing resulting in US dollar-denominated funds being withdrawn from overseas markets, and funding shortfalls are exacerbated. Interest rates look set to rise (borrowing costs as per government debt are already up) and this helps drive the credit cycle. And we know with credit overextended, this will have ramifications.
We continue to be wary of EM, therefore, as an asset class, and within this we are especially nervous about certain geographies. That is not to say that there aren't some interesting stocks out there in some countries, but after a ‘sellers strike’ in the asset class (no one wanted to sell because slowing EM growth was still faster than in the developed world) the long-term nature of investors’ resolve is starting to be tested.
The structural growth story underpinning investors' love for EM is well known and with reasoning. The cyclical aspect of their growth is sometimes overlooked, however. Many investors are only becoming aware of this now.
Matthew Beesley, Head of Global Equities
These are fund manager views at the time of writing and may differ from those of other Henderson fund managers. The information should not be construed as investment advice. Before entering into an investment agreement please consult a professional investment adviser.
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