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THE INVESTOR CENTRE
THE INVESTOR | 41
WELLINGTON MANAGEMENT
Gilts
UK Gilts
Slow growth and upcoming Brexit
referendum mean rate rise is unlikely
WASATCH
Emerging Markets Equity
Indonesia benefiting from oil prices
to offer investment opportunities
Global factors create
highlyvolatilefirst
quarter of 2016
Impact of oil-price slump
onemergingmarkets
hasbeen far-reaching
Ajay Krishnan and Roger Edgley Haluk Soykan
TWEEDY, BROWNE
Satellite manager: Global Equity
Fragile capital markets may create
opportunities for value investors
In the absence of fiscal
action, central bankers
have filled the void
William Browne, Tom Shrager,
John Spears, Robert Wyckoff
T he first quarter of 2016 was
volatile as oil prices and equities
initially declined, before positive US
economic data and a recovery in
energy prices caused a reversal for risk
the Fed’s monetary
tightening began,US data releases
strengthened and inflation ticked
higher, although consumer confidence
fell due to weaker global conditions.
The Fed addressed the prospect of
negative rates.
Eurozone manufacturing dropped
to its weakest in a year and industrial
production declined. Following strong
hints, the ECB cut rates and expanded
its QE programme. China’s GDP
growth slowed to its weakest since 2009
and its manufacturing rate remained
at a contractionary level. Japan’s GDP
also contracted in Q4, but its current
account surplus benefited as falling oil
prices improved trade balance.
In the UK, unemployment stayed at
its lowest in 10 years,manufacturing
surprised to the upside and retail sales
surged on a rise in clothing and
computer purchases. But the economy
is characterised by low inflation,slowing
growth and huge risk around the EU
therefore believe a
near-term rate hike is unlikely.
Deepening concerns about slowing
growth in China, collapsing oil
prices, gyrating currencies, and the
sense that monetary largesse may have
run its course, have sent tremors
through global equity markets over the
past several now have
negative interest rates in around a
dozen countries. In the absence of
fiscal action from increasingly
deadlocked legislatures, central
bankers have filled the void in the US,
the UK, Japan and now Europe.
While these policy initiatives were
critically needed in the early days
following the financial crisis, they are
today, in our view, beginning to ring
hollow in financial markets.Axel
Weber, the current head of UBS and
former president of the Bundesbank,
may have been prescient when he said
that Mario Draghi can promise‘to do
whatever it takes’with respect to
aggressive monetary policies but what
he can achieve from these efforts is a
different matter.Attempts to control
the price of money have, in part, driven
asset valuations to what seem to be
unsustainable levels, and unwittingly
created a fragility in our capital
markets.This could spell opportunity
for value investors such as ourselves.
F rom its high in 2013 to recent lows
below $30 per barrel, crude oil has
declined over 75%.The impact on
emerging market economies has been
far-reaching.While countries that
export oil have been hurt, countries
dependent on oil imports are
benefiting.
Although Indonesia is a major oil
exporter and a member of OPEC,
growing internal demand for energy
has made Indonesia a net importer of
petroleum.Cheaper oil has allowed
Indonesia’s president, JokoWidodo, to
abolish the national fuel subsidy,which
had accounted for some 15% of the
state budget and drained $19.6 billion
from government coffers in 2014.
Having used last year’s windfall to
shore up the country’s public finances,
in 2016 Indonesia is looking to spend
the extra money on infrastructure
projects designed to help Indonesia’s
anticipate increasing
investments in Indonesia.
Our research indicates that emerging
market currencies may be stabilising.
With currency effects likely to play a
lesser role in investment returns, our
bottom-up investment approach is
well-suited to identifying companies
positioned for long-term growth.