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EM—Less volatile than you might think · UBS Trending

• 0:00
  It's no secret that
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  markets are a bit volatile these days and somewhat uncertain.
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  What if we said to take a look at emerging markets
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  in this environment?
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  Want to know more?
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  We'll stay here for another episode of UBS trending.
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  Hi, everybody, and thank you for joining us.
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  My name is Anthony Pescatore
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  and this is UBS trending back in the studio
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  with me for another conversation on the emerging market space.
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  Is the late Herschel Walker from the chief Investment Office.
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  Always good to see you, Alejo.
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  Thanks for dropping. By. So happy to be here.
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  It's been a really interesting market.
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  Of course, we're all keeping
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  track of everything happening around the globe.
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  We're tracking inflation.
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  We're tracking oil prices
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  and the conflict in Iran and other geopolitical events.
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  But E.M.
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  is certainly starting to take a little bit of center stage,
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  especially as you're talking about it.
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  And it's your world here.
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  I think what investors are looking at now is this idea
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  that historically, E.M.
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  has been sort of known as a little bit more of a volatile
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  asset class than, say, developed markets,
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  but it shifting a little bit.
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  Talk about that,
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  because I think that's
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  exactly the way we should get started with this chart today.
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  Absolutely.
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  First off let's review year to date market performance.
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  Emerging markets
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  outperforming developed markets across asset classes
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  currencies bonds equities even since the start of the war.
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  Emerging market performance is flat to up.
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  I think few would have imagined a situation like this.
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  There's a major war and emerging markets are outperforming.
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  But to your point of volatility, if you look at data
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  from the last 18, 24 months, you actually see emerging
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  market assets
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  quite often being less volatile than developed market assets.
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  Concrete example emerging market currencies,
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  meaning most of them on average
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  less volatile than G7 currencies such as the euro, the yen.
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  The pound. Right.
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  So the world is changing and many of the assumptions
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  that have been long held in people's minds need to be revisited.
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  So I guess it's an interesting part of the part of this story.
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  What's behind the shift, however, because
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  initially you would think, well, there's so much
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  volatility globally in the geopolitical world
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  and markets are very uncertain.
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  No one really knows
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  exactly what's going to happen next in this conflict
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  or anything else in the world.
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  What's behind the shift?
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  Why is M starting to become the less volatile asset class?
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  What's behind it?
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  Yeah, I think, you know, we talked about this in prior episodes.
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  Emerging market countries are maturing.
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  They're more stable from an economic perspective
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  and going back to currencies.
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  One of the reasons why emerging market currencies have behaved
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  better in the last 18, 24 months has to do with credibility.
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  Think about their central banks, their independent,
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  their professional.
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  And very recently we saw the Covid related inflation spike.
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  We all suffered from it.
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  But it was emerging markets that moved first, moved aggressively,
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  therefore earning inflation fighting credentials
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  that many other central banks simply didn't
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  think about the fed and how there's criticism this days about,
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  hey, you didn't move early enough,
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  and might you be making a similar mistake again now
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  with the ongoing Iran war?
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  But if you're looking at yeah, I mean, it's a
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  that's a very important point.
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  And when you're looking at the developed markets,
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  there's a lot of policy swings.
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  And again, that uncertainty where just keeps coming up.
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  Anybody who sits in the chair that you're in agrees. Yes.
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  Obviously there's a lot of uncertainty.
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  Which is, by the way, working with a financial advisor
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  at UBS and listening
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  to people like you is really important
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  and having a diversified portfolio.
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  But when you think about policy shifts, unexpected, you know,
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  perhaps movements
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  with central banks,
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  how does that change the risk map for global investors?
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  Yeah, I think you make a good point.
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  Not only have emerging markets matured,
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  you're seeing developed markets in many instances
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  behaving more like emerging markets. Right.
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  Concrete examples elections in the US,
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  in the UK, in France, in Japan
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  didn't used to matter as much as they matter today.
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  And that's because they carry with them
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  very sizable changes in policymaking.
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  Right. That didn't used to be the case.
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  There used to be more consensus about where countries should go.
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  And now there's
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  very sizable divergences
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  between the left and right, the center, what have you.
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  In addition, Anthony, we are living
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  in a multipolar,
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  in a fragmented,
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  in a conflict prone world.
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  And I think this is simply,
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  creating an environment that,
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  you know, just engulfed developed
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  markets, emerging markets, everything.
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  All of the above. Yeah.
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  And you look at countries like India for example.
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  We've talked about India quite a lot.
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  It is a very exciting, country to keep an eye on
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  because how much it's developed in one of our colleagues,
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  Sangeeta went there for a wedding and she grew up
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  there, hadn't been there for like 20 years.
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  And when she went back, she said she couldn't believe how much
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  it had changed in in development in Mumbai.
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  She said the amount of,
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  commerce and buildings that went up, it was,
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  she said it was almost unbelievable
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  to know that she was standing in the same spot
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  she was when she was a child.
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  So countries like India are very exciting
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  and there's a lot of development there.
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  But let me ask you this question, because if you look at em right
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  now, where we are
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  with this slightly less volatility and good performance,
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  is there anything that could knock it off that pedestal
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  to make it to potentially become more volatile again?
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  What do you think that looks like if that were possible?
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  What is that? How would that even happen?
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  With emerging markets you get to track very, very closely global
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  financial conditions.
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  When money is tight, that's a problem.
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  Yeah. Right.
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  And we're living in a relatively easy money backdrop as we speak.
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  War included.
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  Interest rates are relatively low.
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  Equity markets globally are at all time highs.
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  So financial conditions are generous.
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  If financial conditions become more tight,
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  that's something to worry about. Okay.
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  Number two, relatedly, the overall direction of the US dollar.
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  Yeah.
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  If the US dollar, because it's been
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  it's been weak even with the war.
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  Yeah. The U.S. dollar has gone nowhere.
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  It's shocking. Yeah.
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  Historically you would have expected war
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  flight to quality flight to save the dollar.
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  I appreciated that hasn't happened this time.
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  So the world is is changing.
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  But I would
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  track global financial conditions, the overall direction
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  of of the US dollar and commodity prices.
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  Commodity prices have been going up. Absolutely.
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  Many emerging markets benefit from that.
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  If commodity prices were to go down,
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  that could be a challenge, a headwind to emerging markets, right.
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  Those three are some of the key ones. Right.
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  And which thank you for saying that.
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  And I also you know,
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  we're looking at some some countries developed or an emerging
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  starting to use their own currency to pay for oil,
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  which has been a US denominated purchase since Richard Nixon.
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  You know,
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  so it's it's that shift is starting to happen here and there.
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  So it's a little bit of a global pivot.
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  Like the axis is starting to tilt. Yes.
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  That's true.
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  You get to think about a world in which the dollar remains
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  at the center of the global financial plumbing.
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  It's not going anywhere because there's no credible replacement.
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  But at the margin, countries are thinking more creatively,
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  how do I manage my international reserves?
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  In a more diversified manner.
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  So thinking about more currencies,
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  thinking about certain commodities, that's
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  why gold has been doing so well.
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  And we think it will continue to do well.
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  So that move really probably hasn't
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  surprised you all that much,
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  knowing that you are deep in the data.
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  Well, the magnitude did surprise us.
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  The overall direction, is something that we were expecting.
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  Right.
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  So let me ask you before we wrap up, little
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  what's the bottom line
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  as investors are watching us have this chat,
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  where do you recommend opportunities country wise?
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  Is it and where is it equity. Is it debt?
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  Where do you see the best opportunities right now?
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  I think the bottom line is many people are still stuck on the,
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  winning recipe of the 2015 to 2024 period,
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  which was I'm going to only look at the United States,
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  and I'm a only look at technology within the United States.
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  That recipe may not work as well.
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  In the next five, ten years.
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  You get to broaden the aperture.
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  You got to diversify geographically,
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  and you got to move away from a mindset
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  that only focuses on bits, that is software
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  intangible to more atoms.
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  That is hardware tangibles. Right.
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  So and that's a new mind mind set.
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  You get you know just have exposure.
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  Emerging markets can help in that regard.
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  We rate both emerging market equities and emerging
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  market bonds as attractive in our global portfolios.
• 9:03
  Excellent Alejo. Thank you very much. Good stuff.
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  Always great to have you join us.
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  And this time we really did have to kind of take a big picture
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  look at em as things are consistently shifting in that space.
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  So looking forward to having you on again next month.
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  Thanks for coming back. Great.
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  Yeah.
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  Excellent algo Janko from our chief investment office.
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  And thank you all for watching.
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  And make sure to check out our insights website at ubs.com/views
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  for more CIO intellectual capital and thought leadership.
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  Plus, you can follow us on social media
• 9:32
  or on LinkedIn and Facebook.
• 9:34
  Plus, UBS Studios has its own Instagram channel.
• 9:37
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• 9:39
  Lots of content there for you.
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  And as always, please
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  if you have any questions
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  or want to continue this conversation,
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  make sure you're doing so with your financial advisor.
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  Until next time, I'm Anthony Pescatore.
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  Have a great rest of your day, everybody.
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  And remember to keep your eyes on what's trending.
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  We'll see you soon. Thanks.