The direction of market confidence isn’t easy of late given the recent set of events and mixed market data emerging around the globe. One would have put the EU on a steady course to recovery a few months back, yet Brexit headwinds, market volatility and even pressures from terrorist attacks left little to satisfy investors.
If emerging markets (EM) escaped close to unscathed from the Brexit vote, the optimism of the region didn’t last long as emerging market currencies and bonds were hit as a result of the failed coup d’état in Turkey over the weekend.
This now leaves us with a headache of events concurrently occurring, yet a handful of attractive opportunities to consider. When a tragic event occurs, markets have been seen to panic and sell-off in the aftermath, sometimes excessively, as seen in the terrorist attacks of Charlie Hebdo and the Bataclan in France in January and November of 2015 respectively.
On both occasions markets sold off and were quick to recover losses and even went on to exceed previous highs following the November 2015 attacks in Paris. The failed Turkish coup d’état has yet to fully recover from sell-offs, and although the financial sector is one to be wary of, attractive valuations in EM consumer discretionary high yield cyclical debt issues do exist.
The ongoing cautious stance being taken by the US Fed, leads investors to believe the Fed has become more and more reliant on global events in its rate hike decisions, a positive for EM as a whole, heavily impacted by an appreciating USD.
The ongoing cautious stance being taken by the US Fed, leads investors to believe the Fed has become more and more reliant on global events in its rate hike decisions.
An appreciating USD in fact generated gains for many commodity traders post-Brexit as outflows from risky bonds found sovereign bond issues for one but also commodities such as Gold, which predominantly trades in USD. Oil and other commodities also rallied in the weeks following Brexit as they too trade in the greenback currency.
With global powerhouses persisting with monetary easing measures, it seems the US holds one of the keys to make or break the path to global financial stability. But for how long can the US prolong a rate hike?
The latest round of US data has been quite positive to say the least with unemployment down, retail sales up and the Producer Price Index (PPI) marginally beating consensus expectations. The much awaited positive inflation data and wage growth out of the labour market may not be too far off, in which case the Fed may be faced with an ultimatum on its dovish hiking measures.
The Fed is well aware an imminent rate hike could spark outflows from EM, the Eurozone and the UK alike and generate inflows into US sovereigns from investors in search of higher yielding safe haven assets. Yet, the majority of would-be impacted nations are major trading partners of the US and a higher USD coupled with weaker economic growth in these countries will close to definitely potentially undermine the US’s own economic drive.
Having said that, our job is sourcing investment opportunities, and when a further rate hike occurs, US equity indices could be expected to rally in the short term, as historically seen, and correct in the medium to long-term as the US economy reaches the maturity of its economic cycle.
Let me not rush ahead however, as Donald Trump as president of the US in November could very well put a different twist on things. For the time being, our focus is on attractive entry points and with market volatility persistently present and the ongoing earnings season, we are luckily being kept busy until the next set of events unfold.
This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.