American shock

In November, emerging-market year-to-date outperformance suddenly came to a halt, following the unexpected US election result.

Expectations of a renewed reflation trend, increased protectionism and US-centric policies pushed up long interest rates, the USD and US equities, while hitting emerging markets. However, the expected expansionary fiscal policy supported commodity prices, and, additionally assisted by a recovering oil price on the back of an agreed OPEC production cut, helped cyclicals to strongly outperform the more defensive sectors. Most EM currencies suffered against the USD, with the TRL and MXN faring the worst by far. Political instability in Korea, South Africa and Brazil did not help sentiment or the local currencies. In this uncertain environment, a totally unexpected reform measure announced in India on the same day as the US elections hit the Indian stock market. A drastic demonetisation of all 500 and 1000 Rupee currency notes (about 86% of all notes in circulation) hit the country and the market, which feared a strong effect on consumption and the economy. While Asia outperformed the other regions, Russia, Peru and Greece were the only markets to post gains in November.

• We continue to overweight Asia, as the Indian issue should be temporary and as Asian countries should be less impacted by the new US President.
• We are underweighting Telecoms, as they will suffer from the interest-rate rise like everywhere else in the world.
• We are overweighting Energy, thanks to world growth perspectives and the OPEC agreement,
• We are overweighting Financials because of the yield-curve steepening.
• Technological companies and Materials should also benefit from the new context.
• Lastly, Healthcare should benefit from non-interventionism from the Trump Administration