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Happy 60th!

Weekly investor research

09 September 2013

Last week saw two more countries enter the JP Morgan EMBI GD index, the main Emerging Markets bond index, which now covers 60 countries. The investable universe is far larger. Yet, despite this enormous and diverse universe, the market typically tends to focus on just one or two countries and extrapolate to the entire asset class. This is simplistic, irrational, and inefficient. It is therefore encouraging that sentiment about Emerging Markets slowly improved last week despite rising US treasury yields. Countries such as India and Brazil, which only weeks ago were labelled as crisis countries have successfully stabilised their currencies. Others such as Turkey and Indonesia still have work to do, and investors should continue to manage exposures actively, because there are naturally always differences in credit quality across such a vast investment universe (now USD 14trn). Emerging Markets are not in crisis. Not even close. They are not more vulnerable to Fed tapering than developed economies and their fundamentals are not seriously deteriorating. In fact, Emerging Markets fundamentals are improving in most countries, aided in part by the pickup in global manufacturing. The summer sell-off has predominantly been technical in nature. Last Friday’s US payrolls reminded us that the real economic challenges are still in the HIDCs (Heavily Indebted Developed Countries).

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