Since the Brexit referendum last June, economic fundamentals have defied expectations of a sharp slowdown. Despite considerable policy uncertainty, consumer spending remained buoyant, industrial activity and business investment held up well.

We have taken a positive view on Emerging Market debt for some time. Over the past few months, however, we tempered our enthusiasm as we balanced relatively attractive spreads against the implications of rising protectionism for trade-dependent economies. Market developments, however, are now leading us to change our view.  Valuations have become less attractive, even if our concerns regarding the macroeconomic backdrop for many markets have subsided.

Just over a year ago, global markets were unsettled by concerns over China’s decelerating growth. Investors focussed on the mounting leverage in the economy. Commodity prices plummeted. Relatively minor (albeit abrupt) changes to the currency basket were viewed as precursors to a devaluation. Many fretted over the declining foreign exchange reserves, and believed that a “hard landing” of the economy was inevitable. 

"Approximately USD 1.7m are lost forever", shared a wealthy entrepreneur with one of our partners. A few weeks earlier his Gmail account was hacked. The intruders had found old wire transfer instructions with the original signature of the account holder in the email archive, modified and resent them to the banks and thereby managed to send multiple large amounts to their offshore accounts. By the time the fraud was discovered the majority of the money was gone beyond recall.

The equity market rally that followed Trump’s election was in our view largely driven by expectations of tax cuts increasing corporate earnings. For the positive momentum to be sustained there needs to be firmer prospects of economic growth gaining traction. It is here that the picture is complex. 

The past year has been one of multiple surprises. The year started with fears of a sharp deceleration in China, and worries over the implications of rising Fed rates for emerging markets. Some worried that the global economy could slip into recession. Britain was expected to vote to remain in the European Union, and almost all political analysts would have named Donald Trump as the candidate least likely to win the US presidential elections.