Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


Back To Fundamentals In EM Asia

12 Mar 2018

Investment Partners

There is still a long way before geopolitical risk in the Korean peninsula eases materially. Actually, previous initiatives to de-nuclearize North Korea back in the 90s failed to succeed. But the announcement that Donald Trump has agreed to a meeting with the North Korean leader is unprecedented. We are not geopolitical experts and are unable to predict whether this initiative will succeed or not. But, from the perspective of investing, the balance of risks is shifting positively and as such, this has important implications on EM Asian assets. A recent report published by the Federal Reserve uses quantitative methods to conclude that the link between geopolitical risk and both portfolio inflows to EM and stock returns is statistically significant (Measuring Geopolitical Risk, February 2018).

In our view, such developments have the potential to remove a hurdle to equity returns in EM Asia and allow stock prices to evolve more in line with companies’ fundamentals. The softening of geopolitical tensions is taking place at a time when there have been regular upward revisions in earnings expectations. Yet, elevated geopolitical risks appear to have prevented equity indices to reflect it adequately (see charts).

Overall, we believe this should be supportive for EM Long/ Short Equity managers. The Asian hedge fund space has been identified by HFR as one of the fastest growing areas of the hedge fund industry. According to Barclayhedge, the AuM of EM focused hedge fund strategies grew by 60% over the past five years, to reach USD 341bn by end-2017. Within the sample of Lyxor UCITs funds, our EM focused L/S Equity manager has experienced double-digit returns over the past twelve months, and is outperforming since the market trough on February 8th.
In terms of broader hedge fund performance, Lyxor indices (which we no longer report here since they are going through a restructuring) suggest Event-Driven stayed resilient early March despite renewed market turbulence related to trade barriers in the U.S. In parallel, Global Macro funds underperformed.


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