Emerging Markets Lead Performance in 2018

Emerging markets were among the most resilient in the first three months of the year, thanks to cheaper valuations and an increased focused on domestic growth

Scott Dixon 12 April, 2018 | 1:38PM

US President Donald Trump has disrupted stock markets in 2018 with announcements of a trade war on China

The start of 2018 has proved to be a behavioural minefield for investors. Like most of 2017, investors are grappling with a backdrop of trade tensions, political instability, rising interest rates, and a mature business cycle. Yet, perhaps of more importance, investors are now also questioning their own unbounded optimism and recognising that markets won’t always go up.

What is interesting is that the market setback in the first quarter came at a time when the fundamentals remained intact. Corporate earnings continue to rise in the majority of instances and default rates remain low. Hence, the unwinding of performance appears more complex than an unassuming turn in the business cycle.

In this regard, fear-inducing headlines were not hard to spot, with Donald Trump’s threat of a trade war beginning to materialise. Export-oriented markets began to suffer alongside the U.S., with multinational corporations in Germany, Japan, and the U.K. selling off on the back of this news. Even at a sector level there has been little respite, with deteriorating performance across the board.

Interestingly, emerging markets were among the most resilient, presumably due to a combination of cheaper valuations and a market composition that is increasingly focused on domestic growth.

What About Bonds?

Elsewhere, a combination of rising interest rates and widening credit spreads, especially in the U.S., have boosted bond yields from historically low levels. This shift is meaningful, as fixed income and equity markets have shown similar vulnerabilities under this development. The impact was felt most during February and March, with inflation-linked bonds and corporate debt failing to add any value over government bonds.

In contemplating the chain of events, the impact of currency must also be considered. For instance, the US dollar weakened against sterling during the March quarter, dragging on local returns and influencing risk management.

Moving to the longer-term outlook, it could be tempting to attribute the recent market falls to a single factor and extrapolate some form of future expectation. For instance, a trade war between the U.S. and China is a scary prospect with no clear winner. Inevitably though, the market will redirect its attention to the difference between price and the underlying fundamentals.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Scott Dixon  is an Investment Writer for Morningstar Investment Management Europe