Investors Lose Confidence as Currencies Slide

State Street's Michele Hardeman tells Emma Wall how falling emerging market currencies have impacted investor confidence

Emma Wall 8 October, 2018 | 2:21PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Market Reaction." I'm Emma Wall and joining me today is Michele Hardeman, Head of State Street Global Markets Asia-Pacific, to talk about investor confidence.

Hi, Michele.

Michele Hardeman: Hi. Nice to be here.

Wall: Thank you very much for being here. We are here today to talk about investor confidence and how the market has influenced that. I know that State Street have recently done an investor confidence survey which interestingly unlike some others in the market isn't just based on opinion, is it? It's actually based on trades. What has it found?

Hardeman: We found that the investor confidence index has come off quite significantly. Normally, you look at 100 being the baseline. So, currently, it's at 88.3. So, it shows that investors are actually investing in more risk-averse assets, moving away from the high beta assets and taking a much more conservative approach to their investments.

Wall: And are there any sort of regional disparities because this is global index, isn't it?

Hardeman: We are seeing regional disparities. Europe has been up a little bit. North America is down, and Asia has been down quite a bit and I think you can see that reflected in the emerging market currencies. If you think about the flows that we've seen in recent weeks, obviously, we are seeing sort of a huge move in US treasuries, we're seeing a windback of quantitative easing that has a significant impact on the emerging market, Asian currencies in particular.

We would favour an investment profile that sort of look to current account deficit countries versus current account surplus countries and favour those for investments. But certainly, at the moment, the market is very concerned about the US treasury market and the equity market and interest rate differentials and so the impact that that will have on Asia.

Wall: And are they right to be worried, because of course, the way that investors act isn't necessarily the correct way, the way that fundamentals perhaps suggest because we are emotional creatures, humans?

Hardeman: I think they are right to be concerned. I think when you start to have a big shift in central bank policy, that's when you normally get major turns in markets. And so, if you think about the fact that the US were winding back their quantitative easing and forming a much tighter monetary policy, we anticipate there's going to be three further hikes into the next year.

And that starts to weigh heavily on the emerging markets, because people are buying back into the US market, although holding more cash. What ends up happening is that you end up seeing an export of inflation back into the emerging market countries which is unexpected, and I think that people are now starting to think of the consequences of the higher dollar are really going to start to feed through the emerging market currencies in a fairly significant way.

Wall: And why is Europe seemingly swerving this kind of negativity, because of course, the Europe is not without problems. We've got Brexit on the horizon. Turkey obviously has been beset by currency issues. Why do you think that investor confidence is slightly higher in Europe?

Hardeman: I think that they are starting to see some general signs of inflation picking up in Europe. Obviously, over the weekend you saw that the Brexit negotiations appeared to be on a better footing. So, I think people expect that there would be some resolution there. The other thing to always remember about Europe is that a lot of European trade is within Europe. And so, they are less susceptible to the pressures of a strong dollar. The euro is still weak, and the sterling obviously had a fairly strong rally overnight. But I think that going forward, we would expect that the strong dollar will continue to accelerate.

Wall: Michele, thank you very much.

Hardeman: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

 

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Emma Wall  is former Senior International Editor for Morningstar