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Home | RARE Infrastructure Emerging Market Fund Market Commentary – April 2010

RARE Infrastructure News

RARE Infrastructure Emerging Market Fund Market Commentary – April 2010

May 21 2010

Despite ending April slightly up the global markets fell strongly towards the back end of the month as a wave of negative newsflow saw investors assess their risk profiles further (bonds v equity v cash in the cookie jar). And as de-risking gains greater favour the 2010 trend continued with the EMs again under performing their developed peers (MSCI World +28bps and the MSCI EM finishing +12bps in local terms). The EM markets RARE is exposed to were mixed (Shenzhen -8.1% & Shanghai -7.6%, Thailand -3.1%, Brazil -4.0%, Mexico -1.7%), with Indonesia +7.0 and India +1.8% in positive teritory.

The risk/reward balance took a big step towards the defensive at the end of April as negative shock waves rippled throghout the developed world

  • Investors are trying to digest the fall-out of a potential default by an EU nation and the resulting contagion
  • The launch of civil securities-fraud case against Goldman Sachs by the SEC
  • UK faces a hung parliament, and  as a nation, can’t get confidence that anyone is right for the top job

 The events of April bring home to us that the big theme of 2009 (delevering brought about by the developed market excesses of the last decade) is still in vogue with the focus now shifted from the corporates to the governments themselves. This has already proven to be a very painful experience as governments are forced to cut spending in order to attempt to establish fiscal credibility.

 Although the concept of cutting government spending in the midst of a crisis may be new to the developed world, the EM’s have been here before (1990’s and early 2000’s) and as many investors are forced to add a sovereign risk premium for Eurozone countries, they are rewarding the EM countries that have their fiscal house in order

  • Russia issued US$5.5 billion in its first international debt sale since the 1998 default
  • The extra yield investors demand to hold EM debt rather than US Treasuries sank to ~2.3% in April, the lowest level since Dec 2007
  • Brazil raised it’s benchmark interest rate (up 75bps to 9.5%) to prevent an “overheating” of the economy
  • Investors view the China risk to be a new bubble and want governments to intervene – very different to the no growth, high unemployement, sovereign balance sheet issues of the developed world

 We will likely continue to see volatility in the EM as contagion risk creeps into the picture but we remain focused on putting money to work in countries that are structurally focused on maintaining organic domestic growth and not reliant on the return of excess liquidity to fund demand.