China and the Fed weighted

Uncertainty over China and the Fed's intentions on rates continued to depress global and emerging markets in September, despite some stabilisation towards month's end.

The MSCI Emerging Markets slightly outperformed the developed markets, but still showed their worst quarterly performance since 2011. The deteriorating macro situation in China unnerved the markets, not least on the commodity complex, seeing prices falling further and hitting a lot of Emerging Markets (commodity-sensitive) currencies. Uncertainty over the timing of the Fed's "lift-off" and, later, the confusion after the "no-rise" communication, added to market concerns and continued EM assets outflow.

MSCI China saw some stabilisation in September, when weak economic numbers were followed by growing indications of a government stimulus in the making.

Korea (Won, recovery of auto sector and the return of the Chinese tourists) and India (higher-than-expected rate cut) were the only markets to remain in positive territory. A slight recovery in the tech sector and a rate cut kept Taiwan from falling further, but Indonesia and Malaysia continued to see their currencies hammered.

Commodity-sensitive markets and currencies in EEMEA (Russia, South Africa) and Latin America (Brazil) also suffered, while (geo-)political events weighed on the Turkish market (actions against Kurdish militias, November elections). Brazil tumbled most, as political tensions added to a worsening macro picture, resulting in an S&P credit-rating downgrade.

• Linked to September’s huge volatility, we underperformed our benchmark, as the positive contribution of stock selection in China, Mexico and Egypt was not enough to offset the negative impact of the Brazil (currency) exposure or the negative stock-specific Korean performance.
• With continued uncertainty over China, the Fed and the overall global economy, we can expect market volatility to continue in the months to come.
• The complex environment of external factors and local political and policy uncertainty will act as the main drivers of divergence in Emerging Markets performance. Counter-trend rallies from the current oversold state of several markets cannot be excluded.
• We remain prudent in our stock selection, maintaining our focus on quality stocks with a sustainable growth profile in a diversified and balanced portfolio.