But there have also been some interesting moves in the Gulf States
THE United Arab Emirates (UAE) and Qatar were finally upgraded to emerging market status from frontier markets by MSCI last week. Qatar was the surprise, and Bank of America Merrill Lynch (BoAML) subsequently raised its view of the Qatari stock market to overweight from neutral. The investment bank believes the upgrade could attract $600m (£382m) of index-linked funds to the Gulf state. Elsewhere, BoAML still sees Saudi Arabia as a preferred market and, depending on if and when the Turkish protests end, it is keeping an overweight rating on a country some still describe as an Islamic democracy.
The name of the game, however, continues to be global central bank stimulus, and what happens once support starts to be scaled back. Emerging market corrections are already happening because investors think fund flows into these risk-on areas will reverse to the benefit of core developed markets, once the Fed and the European Central Bank decide to take a more passive position on aiding the recovery. A few months ago, we were suddenly discussing whether market support would be withdrawn over the summer (now). But while markets got ahead of themselves on this initial speculative timeframe, we’re starting to see actual market repositioning taking place.
Daniel Morris, global strategist at JP Morgan Asset Management, says that austerity (while right in theory) isn’t helping the recovery. He still sees more of a negative shift coming, and says that the long-awaited reset in bonds appears to have begun. Morris thinks there could be an equity market correction of 10 per cent once the Fed ends its QE3 stimulus programme of buying mortgage-backed securities and bonds.
In contrast, others think the central banks are doing what they can to prepare the markets for a withdrawal of support, and that a lot is already priced in.
Simon Ballard, a senior credit strategist at National Australia Bank, says the markets are much too bearish on their analysis of possible Fed tapering. He argues the goal posts for risk-on, risk-off trade have shifted. There is now a strong bias towards de-risking, and the global credit markets are held hostage by the direction of the rates markets. In general, Ballard thinks Eurozone credit markets will continue to underperform US credit markets.
When looking at asset performances, we continue to see a lot of selling of financials. Asset managers, insurers and banks have all been under pressure, as higher bond yields could likely be a result of central bank tapering. Valentijn Van Nieuwenhuijzen, head of strategy at ING Investment Management, is particularly concerned about the recent rise in peripheral yields. This shows renewed investor nervousness over the already weaker economies of Europe. He says ING’s equity stance has become slightly more cyclical, and it has increased its exposure to the commodity cyclicals after the recent steep sell-off.
Louisa Bojesen is the presenter of CNBC’s European Closing Bell. Follow Louisa on Twitter @louisabojesen