Markets have been dominated by the evolving euro crisis and concerns over contagion from the periphery to the core and consequent implications for the European banking system. The growing worry has been reflected in high levels of market volatility and rising sovereign bond yields.
What may have started as a peripheral problem is swiftly threatening to engulf the core countries of the eurozone. Perhaps as a sign of things to come, S&P recently appeared to downgrade France on its website but later confirmed the change as an erroneous “computer glitch”. France is not without vulnerabilities. Its economy is slowing, it has the highest debt levels among the AAA euro-zone nations and has several big banks exposed to euro- zone debts.
Is it any wonder then that investors are turning their attention to regions a great deal further afield, specifically the US, emerging markets and Asia Pacific? The recent Bank of America Merrill Lynch survey of fund managers has confirmed the same.
The US is likely to remain resilient and fears that the economy could plunge into recession have been allayed after a strong 2.5 per cent GDP figure for the third quarter and US treasury bills will see continued demand in a flight to quality away from the eurozone.
Asia and emerging markets, although still largely tied to the US and Europe for final demand for its goods and services, seem to be coming out from under their shadow. Credit Suisse points to the fact that China’s imports from Asia have risen by 30 per cent more than China’s exports to the US over the last 10 years.
Importantly, emerging markets have the room for policy manoeuvre and markedly better fundamentals in the form of healthier fiscal balance sheets and reserves, a characteristic not reflected in their stockmarkets this year. The MSCI Emerging Asia index has dropped by over 10 per cent, reflecting the risk aversion spurred by events in Europe, and could offer a potential buying opportunity.
The spiralling eurozone crisis is causing pain to some of the companies in this region but a far greater influence comes from the rise in demand in these markets, a surge in domestic consumption, rapidly rising living standards and young demographics.
Although the long-term bull case for Asia remains pinned to improving demographics and lifestyles, in the short term, it is more likely to be enduring the effects from a growing risk aversion in the West. However, to some extent, it can continue to forge its own path.
If a credit crunch in Europe constrains lending into the region, Asian financial institutions are more than capable of stepping in, as they have done in the past.
As the whole world and its dog appear to be bearish on Europe, those with a contrarian view need not stay away from this region. Eurozone stocks, excluding financials, offer good quality companies that will benefit from euro weakness and will be able to take advantage of growth in other parts of the world.
The euro will weaken further and investors may want to consider hedging their currency exposure.
With low visibility in the macro-economic picture and political turmoil in Europe continuing, we firmly believe diversification is essential for investors in these uncertain times. A multi-asset, multi-manager portfolio invests in different asset classes and styles and will take advantage of the volatility in markets.
Ayesha Akbar is portfolio manager of the Fidelity multi-manager growth portfolio