3rd October 2011
The instability in the Eurozone has produced some surprising victims. Given the uncertainty of the outlook over the global economy, is this justified or does this represent an opportunity?
1) China – Chinese funds have been hit hardest by the crisis. The average fund in the China/Greater China sector is down 22.7% over three months (Trustnet). This is 0.8% worse than the Europe ex UK sector.
The weakness has been caused by both real and perceived problems with the Chinese economy. On the one hand, there are fears that if the global economy slows, China and other export-led economies will falter. There are also signs of strain in the Chinese property market, and a more detailed view here.
But its woes should not be overestimated: There are plenty of well-respected names in the blogosphere that still believe China is a good bet. The economic data is by no means all one way. Equally, the weakness in the Chinese market comes on the back of a poor run of form for the China markets anyway.
2) Brazil – International investors can be unimaginative and Brazil is often still treated as a warrant on the global economy. In some ways this is true, Brazil is a commodities producer, commodity prices suffer in a climate of weakening global growth. But the economy has many other strings to its bow. An examination of the country's exports shows that commodities form less than half: http://www.bcb.gov.br/?indicators
This piece is a handy guide to Brazil's economic forecasts. There are domestic worries, centred on credit growth. The Central Bank has raised rates significantly to address this, though rates moved down 50bps at the end of August on worries over global growth.
There are certainly those in the blogosphere that see opportunities in Brazil. On Seeking Alpha, for example, Justin Dove points out that the International Perception of Brazil Monitor study found that the likelihood of Brazil receiving foreign investment rose from 35 points in May to 43 points in August. . He says: "Hopefully it will be by the year's end, but as investors continue to throw the baby out with the bath water, there will certainly be some buy-low opportunities ahead. And with Western economies struggling in Europe and the United States, investors are poised to invest more in emerging economies that are showing better growth."
3) High Yield – High yield bonds may not have seen the precipitous falls of some parts of the equity market, but the sterling high yield bond sector has still lost 9.7% in three months, more than any other bond sector.
This FT article by Cardiff Garcia aims to examine why spreads over government bonds have moved to historic highs. The question is really whether the high yield market is predicting a crisis, in which case there is no opportunity, or whether it is simply reflecting worries that there might be a crisis, in which case, there is an opportunity. It concludes that high yield bonds have traditionally not been leading indicators and therefore spreads look wide.
Recent successful issuance has given some support to the sector.
Wes Sparks, head of fixed income at Schroders, writes on Schroders TalkingPoint: "While investors who already have exposure to high yield bonds may be tempted to cut and run out of fear of worse to come, we would point out there has already been a massive market move in a very short period. The market is already pricing in a high probability of a mild recession, and current valuations may ultimately prove to have overshot fair value."
Kim Stephenson says: "There will be some lovely explanations of why Brazil and other assets have done what they have done. And they will contradict one another, and maybe everybody will decide one is the right one, or maybe (as usually happens) there will be two or three favorite theories out of the hundreds suggested that most people believe. But at the end of the day, nobody on the planet knows why." As such, the emotion that is sending these markets lower could turn on a sixpence. If investors like them for the long term, there are opportunities.
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