Latest Performance Bulletin from Saunderson House – November 2016
This time last year investors were growing increasingly concerned that the US central bank, the Federal Reserve, was set to embark upon a series of rapid interest rate increases. This would, in all likelihood, heap further pressure on the already unloved and out of favour emerging markets. Investor caution towards emerging markets was already high due to concerns about the Chinese financial system, as growth appeared to be wholly dependent on the ever rising levels of debt.
Against this backdrop, the ‘obvious’ trade was to hold assets denominated in US dollars, as these would benefit from US dollar appreciation, and avoid countries and sectors with exposure to emerging markets, which would suffer from higher US interest rates and a stronger US dollar. By contrast, our value-based investment approach resulted in very different portfolio positioning, not least heavy allocations to emerging markets and Asia Pacific (ex. Japan) equities as these were, in our view, very attractively valued.
As events transpired, US interest rates did not increase by much and the US dollar did not strengthen. It is often the case that the peak of investor pessimism coincides with exceptional investment opportunities. This is exactly what we have seen in emerging equity markets over the past 12 months, with gains of more than 36% for sterling based investors.