How to deal with choppy markets

Marcus Svedberg of East Capital explores how investors can deal with choppy markets, and how they should view and approach allocations to emerging markets.

However, at some point, he said investors need to look at fundamentals in terms of which assets are attractively valued, and also at where the real problems are in the world for medium- to long-term buyers.

There is widespread consensus that this real problem is debt – a combination of sovereign, private and corporate debt – and primarily in the West. And this is combined with low growth, said Svedberg.

Shifting focus and allocations

Meanwhile, Svedberg said the other half of the global economy – emerging markets – is on the other hand growing at between 5% and 9% a year, and with debt levels at two-, three- or even four-times lower than in the West.

Many of these markets have also consolidated their balance sheets in previous crises, making them leaner and stronger, he explained.

Yet while there is a “flight to safety” and “flight to quality” during volatile times, said Svedberg, adding that this is irrational because investors are piling into asset classes where the problems are.

Structurally, in the medium to long term, there should be a general shift in allocations by investors to emerging markets – whether in currencies, debt or equities. And this is something that Svedberg expects to see going forward.

Allocating to emerging markets within portfolios

According to Svedberg, investments should involve easily-explainable rationale, which is why he likes investing into consumption.

For example, he said it is easy to explain why a person in Vietnam, Turkey, or Russia, for instance, will purchase a certain product when they can afford it.

Consumption of electricity will also increase in many emerging markets as they become more modern and develop their infrastructure.

Looking at more developed markets

At a certain point, when stock markets revalue, Svedberg said some of the more developed and liquid markets in the West will increase in value before this liquidity trickles down to emerging markets.

For investors who want to gain more exposure to Western markets, they can invest in companies in the West which have a lot of exposure to emerging markets, he added. This way they get the liquidity and corporate governance while still benefitting from the growth in emerging markets.

But this is all focused on the short term, said Svedberg, adding that emerging markets have continued to outperform over longer periods – and he is confident they will continue to do so.

 

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