Risk Takes Center Stage
By Peter Goodall | September 11, 2018
Global markets pared gains last week as concerns over trade and contagion in the emerging markets came closer into focus. The MSCI world index lost 1.69% while the S&P Index lost 0.98%.
Brazilian Front Runner Stabbed
Jair Bolsonaro, the front runner in the Brazilian election was stabbed during a rally. He is currently in stable condition. Bolsonaro, a deeply divisive candidate, received a surge in public opinion after the attack. Current polls show a runoff election between Haddad and Bolsonaro within a 1% margin of error. The broader markets rallied on news of the improved polls. Haddad (Lula’s replacement) is now facing corruption charges. Unlike Lula, Haddad will be able to run since the trial cannot occur prior to the elections. Year to date, the Brazilian economy has underperformed both the MSCI Emerging Market Index and the MSCI World Stock Index. Most of that is attributable to the currency depreciation. LOM funds have benefitted from being underweight in the country this year, only taking strategic bets.
Tech Leaders Meet Congress
Members of Twitter and Facebook met with US lawmakers on Wednesday to testify on foreign influence and accusations of bias against conservatives. Google declined to send a representative. The senators indicated that regulation may be in the pipeline. Shares of Twitter (-13.33%), Facebook (-7.22%) and Google (-4.38%) experienced sharp declines during the week. This came after news from Jeff Sessions of the Justice Department who was concerned that the social media platforms were “intentionally stifling the free exchange of ideas.” While regulation may reduce profitability, it tends to protect larger, established players.
Emerging Markets Currencies
Emerging market currencies showed signs of stabilization on Friday, led by gains in the Turkish lira. That said, there is still a lot of risk in the emerging market space, which has experienced a rough year. It is worth noting that the Lira showed signed of degradation again on Monday. The below chart shows the year to date Turkish lira per dollar spot rate. A dollar can by 70% more lira this year.
Many of the changes discussed today shouldn’t have long term impacts on the markets. The Brazilian elections are about a month away. A lot can change between now and then. The congressional hearing may have negatively impacted the tech sector but the proposed changes are more likely to help the established players more than hurt them. Based on what we can see today, the emerging markets space may not be completely out the woods yet. However, we are beginning to see long term value in many individual companies within this asset class. When an entire sector of the economy goes down because of individual actors (be it in tech or the EM space), there are usually opportunities to find good companies at a reasonable price.