A slowdown in the world economy could expose investors in the US equity market, according to Ashmore’s head of research Jan Dehn.
Speaking at the investment management company’s biannual emerging markets update, Mr Dehn told Fundeye that the macroeconomic factors dominating the news cycle were unlikely to have significant ramifications for the global markets, and would not surprise investors.
He said: “Everybody is aware there is a coronavirus, everybody is aware there is a slowdown in China, everybody is aware of Brexit, everybody is aware of the trade wars in the US. All of these factors are not very interesting. They are not interesting because they are priced in. You can argue whether they are correctly priced in or not, but we are talking about marginal differences here.”
Instead, Mr Dehn argued that the greatest potential for disruption would come from where investors had placed their money, namely developed markets. In particular, he singled out the European fixed income market, and the US equity market.
“If you really want to find out what is driving global markets, you have got to ask yourself ‘Is there a major threat to European bond markets, and is there a major threat to US equities markets? Everything else is pretty marginal and temporary.”
Any potential downturn in the global economy was, in Mr Dehn’s view, unlikely to disrupt European bond markets. The money flowing into European bond markets was a consequence of a decade of quantitative easing being followed by ultra-low interest rates and flawed policies to accentuate growth. Instability would only embolden investors who had been motivated by caution in the first place.
Forecasting the future, he said: “If we go into another recession, bond yields will continue to fall. Investors in European bonds are going to continue to make money.”
Noting the recent success of European fixed income investors, he added: “If you went long German 30-year bonds ten years ago: then congratulations, you are up 150 percent. That is why a lot of investors put money into those markets. That’s where the money is sitting.”
By contrast, the investments in the US equity markets were motivated by much more ambitious, riskier strategies.
Commenting on the state of the equity market across the Atlantic, he said: “US stocks are at 500 percent since quantitative easing began, the dollar is up 30 percent against the Euro and 50 percent against EM currencies. I guarantee you; a lot of investors bought a lot of US assets. We estimate that $10 trillion dollars, that is half of US GDP, has entered into financial markets in the US from the rest of the world. That has primarily gone into equities, because the US has been in a recovery.”
Mr Dehn believed this situation would have an adverse effect on investors if the growth global economy was compromised.
He concluded: “If the US economy begins to slow, then there is a ton of risk-seeking money sitting in the US equity market which is definitely in the wrong place. That is really what matters.”
