Sheila Patel, the chief executive of Goldman Sachs Asset Management in Asia and the Middle East, picked a tough week to visit Australia to promote investment in emerging market economies.
While she was meeting institutional investors in Sydney and Melbourne, investors in emerging market equity and debt funds were driving the largest weekly fund outflows since 2011.
About $US6 billion was withdrawn from emerging market debt funds and about $US5.4 billion was pulled out of emerging market equity funds, according to data from EFPR Global.
The emerging markets, which are an essential part of any balanced portfolio, have been hit by the election of Donald Trump as President-elect of the United States. Trump has made investors nervous because of concerns about globalisation, the movement in the US dollar, the direction of US interest rates and the potential impact on foreign direct investment.
The imminent arrival of the former bankrupt property developer in the White House is causing massive movements in currencies, bonds and equities.
"We may now be on the verge of the most significant shift in the macro environment since the global financial crisis," Willem Buiter, chief economist at Citi, told clients this week.
"We have spent almost a decade in a secular period of slow but steady growth, uniform policy and suppressed volatility. All that looks like changing now with policy shifting to a far more diversified basis."
Buiter's message was echoed by economists at banks all around the world. At Barclays in New York, economists Ajay Rajadhyaksha said Michael Gavin said we are now headed for mildly improved global economic growth, firmer inflation and a shift to fiscal stimulus in major economies.
"The prospect of fiscal stimulus, higher US yields, and a firmer US hiking cycle should all push the USD stronger, especially against the EUR and EM currencies," they said.
It is noteworthy that over the past decade global investment banks have wound back coverage of individual equities research and focussed the bulk of their research budgets on getting the big macro calls right.
Making the right calls can mean the generation of huge profits in their dealing rooms and treasury divisions.
It is equally important for retail investors and self managed super fund trustees to have a working knowledge of the thinking behind the big macro calls. They should be thinking through the implications for their own portfolios of the various scenarios presented by economists and strategists.
Patel from Goldman Sachs says there have been two burning issues on the minds of investors she has spoken to over the past month in Australia, the Middle East and Asia.
These are globalisation and protectionism.
"When our clients look at the world today they see a risk equation turned on its head," she told Chanticleer.
She said there are many balls in the air following Trump's election including corporate taxation in the US, the possibility of the repatriation of capital by US companies, fiscal stimulus in the US and fiscal stimulus by the US government.
"One thematic is the focus on the local and regional," Patel said.
"Because of these various groundswells of protectionism people have become much more focused on domestic stories or regional stories.
"They are asking 'What opportunities do I have where the clear beneficiary won't be affected by the cross winds or unpredictability of populism or anti-globalisation movements?"
Patel said there are many countries in Asia that provide those strong local or regional stories for investors. She said India is a good example because of the reforms of Prime Minister Narendra Modi.
"I think some of the reforms in India have been heartening," she said.
"It still can be a harder place to do business but people are starting to make some returns."
Patel is positive about the outlook for China despite its credit driven asset bubble.
She says that the "bar bell" investment strategy is popular among clients of Goldman Sachs Asset Management.
At one end of the bar bell is investment in a range of alternative investments including infrastructure and private equity and active investment in emerging markets. At the other end of the bar bell is passive investment in developed country equity markets.
This is in contrast to the approach taken by most Australian retail investors and self managed super funds.
These investors usually opt for a passive exchange traded fund. A typical ETF focused on emerging markets will invest in the top 50 companies in Asia. Given the structure of the markets in the region and the size of companies in the region that usually means a 30 to 40 per cent exposure to China and about a 20 per cent exposure to South Korea.
Up until the US election on November 8 emerging markets were faring quite well. In fact, in the six months to October emerging market equities were the top performing asset class, according to analysis by Morningstar.
In that period, emerging markets were up 10 per cent compared to a 6 per cent rise for Australian small caps, a 3.5 per cent rise for Australian large caps, and a 2.5 per cent rise for international equities and Australian fixed interest, according to Morningstar.
Longer term returns from emerging markets have been reasonable with an annual return over three years of 5.7 per cent and over five years 7.8 per cent per annum. That beats the three year returns for Australian large caps and small caps of 3.9 per cent per annum and 4.4 per cent per annum, respectively. Also, it beats the five year return for small caps of 2.7 per cent per annum. But that does not quite beat the five year return of large caps of 9.2 per cent per annum.
Emerging markets have always been sensitive to movements in the US dollar. In fact it was a collapse in local currencies against the dollar which was a feature of the Asian financial crisis.
The US dollar has soared against the Euro and risen against all Asian currencies in the past 10 days in tandem with a 30 per cent surge in US 10 year Treasury yields.
Asian emerging market economies are more resilient today than they were in 2007 but it is impossible to predict how they will respond to Trump actually being in the White House.
