Has the great rotation come full circle?

The BRIC economies are not the hot investment they once were, with Brazil hitting a bump in the road and seeing its stock market enter a bear market early this month.

Russia has also seen its stock market plunge - dropping around 17% since reaching its 2013 highs. With both the Brazilian real and the rouble losing value (the Brazilian currency falling to four-year lows), there is a distinct feeling that easy profits are not necessarily as readily available.

American influences

From Brazil to Turkey and China, where recent economic reports continue to suggest a slowing economy, there is the increasing expectation of a Federal Reserve policy shift. Rising interest rates on US Treasury bonds are changing the way investors look at the world, especially emerging markets.

European markets rely on emerging markets for a third of their revenue, and while there may be a case for longer-term profit expansion in some of the faster-growing markets, there is cause for concern in the shorter term. The slowing of these economies is likely to impact company revenues.

There had also been a feeling that China would be the knight in shining armour when it came to eurozone debt, and that now looks extremely shaky.

Manufacturing struggles

China’s manufacturing data is at a nine-month low, making the prospect of a hard landing slightly more likely.  And while, based on today’s data points, we may be seeing the beginning of green shoots emerging in the EU peripheral countries, coming from such a low base manufacturing data could really only improve. Looking at the unemployment numbers, one could say that one swallow does not make a summer.

The eurozone core itself is starting to feel the breeze at this stage, with Germany’s manufacturing failing to meet expectations. What can investors make of this new anomaly? Is there perhaps a sense that Germany will note that austerity may not be the way forward, and thus ease up on its measures? Or perhaps there will be a feeling that Germany has done enough to help the other member states (an incorrect assumption), in light of the fact that many European finance ministers may now have taken their collective feet off the pedals when it comes to structural reforms, purely because Mario Draghi invited complacency with his ‘everything it takes’ band aid.

I feel we must once again look to the United States. They at least have a common monetary policy, but more importantly the USA is a country in possession of political, banking and fiscal union. Exposure to that economy, whether it is as a result of loose monetary policy or improving fundamentals, seems the smart move.

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