Concerns that escalating trade tensions will slow global growth have prompted equity markets to retreat from recent highs and have helped send global bond yields lower. Growing political concerns have further dented investor sentiment in recent days.
- Argentine assets slumped on Monday following the surprise defeat of Argentine President Mauricio Macri in last weekend's primary elections by the populist opposition candidate. The benchmark Merval stock index fell 38% in dollar terms, the largest decline since 1990. The peso dropped 17% to a record low versus the dollar, and Argentina sovereign bond spreads widened by almost 600 basis points. We would advise against adding Argentina fixed income risk on weakness until a clearer economic agenda from the opposition emerges.
- Fears of an imminent split for Italy’s ruling coalition government have weighed on Italian assets, after Deputy Prime Minister Matteo Salvini last week called his coalition government “unworkable” and vowed to force new elections. Reports that the Five Star Movement and Democratic Party are discussing a possible coalition to prevent the need for a new election helped stabilize bond yields on Monday. But against a backdrop of falling bond yields elsewhere, Italian 10-year yields have increased by around 30 basis points in the last week. The FTSE MIB stock index has dropped by 9% since mid-July. Concerns over Italian government policy have factored into our underweight position on Eurozone equities in our global tactical asset allocation.
- Under pressure from escalating US-China trade tensions and domestic political unrest, the Hang Seng index on Tuesday handed back its remaining gains for the year and is now trading in negative territory. The Hang Seng is one of the few equity markets to be down on the year. In our Asia portfolios, we maintain our longstanding underweight to Hong Kong equities.
Volatility based on political events is often short-lived and contained to local markets. But the turmoil also illustrates the benefits of diversification. Argentina makes up just 2.3% of JPMorgan's EMBI Global Diversified index of USD-denominated EM sovereign bonds, and just 0.4% of the MSCI EM equities index. Hong Kong represents only 1.2% of the MSCI AC World Index, while Italy's weighting is just 0.7%. We recommend holding a diversified portfolio to mitigate the risks from idiosyncratic events.
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