Jean-Baptiste Berthon

Jean-Baptiste Berthon

Senior Strategist, Cross Asset Research

Lyxor Asset Management


EM Markets : Favor Relative Players

23 Apr 2018

Investment Partners

All strategies performed well this week. CTAs took the lead, supported by their short dollar positions and long energy positions. The diversified L/S Equity and Special Situations funds also shined, mainly boosted by their long bias.

Since the February correction, alpha conditions, which were great, normalized. The worldwide re-correlation of stocks is persisting as investors focus on trade concerns, geopolitics, peaking economic trends and the implication from politics on the pace of reforms in Europe and Japan. In that context, companies’ fundamentals are less central. The flurry of investment themes in the U.S. and Europe still provides opportunity for hard-catalyst stocks, but selectivity is arguably required within L/S Equity allocation.

One segment is offering more relative opportunities: the EM markets. For a time, EM equities were supported by the economic traction in DM countries, from weakening dollar and from rates. As the monetary normalization moves forward and with DM economic growth peaking, the external support for EM markets is fading. A greater focus will be put on idiosyncrasy. The Chinese deceleration, the consequences from trade concerns and Tech are central to Asian countries and companies. Elections in Brazil and Mexico, the progress in NAFTA talks, trends in commodity prices and the stance of central banks will drive Latin America performances. Middle-East geopolitics and the U.S. vs. Russia standoff, as well as the pace of European growth will dominate in Eastern Europe. As a result of these multiple dynamics, EM indices and stocks returns are diverging more than in DM markets. Equity correlations are also substantially lower.

The strong run of EM focused L/S Equity funds since mid-2016 is unlikely to repeat. However, elevated commodity prices, a healthy EM economic pulse and still relatively easy financial conditions set a supportive stage for EM L/S managers to extract alpha. They are preferred over their directional peers.


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