There has been a series of market wobbles so far this year. The volatility shock in February, the technology stock price shock in March and an emerging market shock in the last couple of weeks. Are these related?

Is it a consequence of the end of super-easy money in the US? Market returns are “flattish” so far in 2018. If growth is still strong they could recover. However, investors should consider the possibility of a summer of disappointment (and not just for England football fans) if US yields keep rising above 3%.

  • Emerging market debt is one area that has shown a significant deterioration in performance since the beginning of the year. The rise in external debt in emerging markets has increased the vulnerability – all else being equal – to a higher dollar and higher US interest rates. What are the arguments for holding on to a position or adding to a position in emerging market debt? The first is that the asset class has got cheaper. Secondly, the deterioration in performance has already been quite severe. Thirdly, the fundamental story still has some legs.
  • If US yields and the dollar remained stable, emerging market bonds can probably perform again given the sell-off and higher yields. Medium term, I strongly believe in a role for emerging markets in a global fixed income portfolio. It provides additional yield relative to other hard currency assets, diversification if local currency exposure is sought and the ability to take advantage of macro-economic factors that differ from developed markets.
  • It could be Italy again that poses the biggest challenge to the European Central Bank as it looks for a way to escape negative interest rates. I do like the idea of having some long duration in the bond portfolio as a hedge against “risk-on” turning to ”risk-off” this summer.