J O Hambro Capital Management

July (and the early days of August, up until this piece was written) has seen significant volatility in global financial markets, including emerging markets. The main cause of this is a combination of softer US economic data coinciding with an increase in policy interest rates in Japan. This has led to multiple dislocations in fixed interest and currency markets, as carry trades (funding in a low-yielding currency to invest in a higher-yielding currency) were aggressively unwound, in turn causing a rapid risk-off move across most global financial markets.

Sticky inflation and growth surprising on the upside are delaying rate cuts, while market performance remains narrow

As an asset class, emerging equity markets are substantially driven by two broad global drivers: global end-demand and trade, and US dollar interest rates and liquidity. While individual markets will have their own business and credit cycles and political environments, these are always interacting with the main global drivers. One of the challenges for investors in the asset class at the present time is the differing signals these are sending.

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With inflation continuing to soften, and growth returning, European valuations look still more attractive. 

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