Emerging market equities outperformed in August, while commodities recovered and European equities lost some of the ground they had gained over the summer. Despite all the talk of emerging market outflows, the reason that traders started looking at lower quality, alternative assets remains: it’s hard to make decent returns with U.S. and European equities right now.
Emerging markets holding stable
Over the last few years U.S. and European equities market have been rough simply because the recession had knocked the wind out of everyone’s sails. Now, with promising second quarter results, the problem is that so many traders have gone back into developed market that prices are high, while emerging market equities still hold promise even if the risk is high. “Helped by currency devaluation, some emerging market indices resisted the fall in global equities over the month,” write Barclay’s analysts Joao Toniato and Dennis Jose. The trend wasn’t universal—India, Singapore, and Turkey were among the worst performers in August, but most people who fled Emerging Market for other equity markets took a hit.
Shifts in commodity prices
Commodity prices tell a similar story. People had been keeping their money in gold and other defensive assets during the recession, but as growth has picked up they want to find better returns. Also, the growth in physical demand for many commodities has been depressed by China’s slowdown. Both of these seem to be good reason to move away from commodities, but they too outperformed in August.
“Oil and metals prices have risen over the month. The former has been largely a consequence of political tensions in the Middle East and North Africa while the latter seems to be associated with an improvement in confidence in the Chinese economy. This boded well for the basic resources and the oil & gas sectors, which were both among the top performers in Europe in August,” write Toniato and Jose.
That’s not to say people should now jump back into emerging market equities, Toniato and Jose are underweight on defensives and recommend people increase their exposure to a growing European market. But it’s another reminder that following the crowd can be expensive when the story that everyone is telling doesn’t pan out.
