Salient to Investors:

Richard Titherington at JP Morgan Asset Mgmt said:

  • Everyone assumes the US debt default will be averted, but it illustrates that these are uncertain times.
  • Emerging markets are cheap for a reason because in the last 12-24 months they disappointed and there were better returns from the US and European markets. Investors are rightly nervous about emerging markets and they are not a safe haven.
  • Emerging markets consist of 30+ countries in differing economic situations and some countries will benefit from US economic recovery and some will suffer, so investors need to drill down for the country and company they want to invest in. The fragile 5 with current account deficits are Brazil, India, Indonesia, Turkey and South Africa. Current account surplus countries like Korea, Taiwan, and China look more robust.
  • In China there is early and good evidence of a shift toward consumption away from exports and fixed asset investment, away from factories to offices.
  • In half1, 2013, everyone was very worried about China, but in half2 people suddenly started worrying about India and current account deficits and no one worried about China. However, underneath there are lots of things to worry about.
  • Chinese regulators are addressing these issues, but because it is a closed capital account, it is like pressing on a balloon: crack down on one area and money will flow somewhere else, and until they open the economy these issues will continue. However they have cracked down on shadow banking and they have reminded people there is risk – a bubble comes when people don’t see any risk.
  • Investors should own safer countries in emerging markets, beneficiaries of the recovering US economy, and avoid the classic mistake by paying a big premium for growth because emerging markets are still a high risk asset class.
  • Fed has tried to warn people of eventual tapering so it was surprising to see the market euphoria in September because tapering is going to happen.

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