Currency losses and oil prices WEIGHED

The emerging markets ended another difficult and volatile year, with a sharp sell-off at currency level in early December. The RUB, in particular, suffered strongly, hitting an all-time low against the USD; the CBR was subsequently urged to increase its policy rate from 10.5% to 17%.

Overall, the continued oil price decline and the dollar strength were the main forces behind the market/sector divergence, although most emerging markets and currencies remained under pressure due to the contagion risk and overall risk aversion. A new political crisis in Greece did not help sentiment at all.

Brazil, Malaysia, Mexico and the Middle-East suffered the most from the falling oil prices.

The Chinese market was the only market to end in positive territory in December. With the opening up of the market, linking Shanghai with Hong Kong, the local A-market rallied in December.

This, with the recovery of the US market and a stabilisation of the dollar and the oil price, helped the markets regain part of the lost ground towards the end of the year.

• Despite the tough environment last month, we were pleased to see our strategy outperform.
• This was achieved thanks not only to some of our conviction ideas, but also to the underweight in the energy and telecom sectors, as well as to our exposure in strong companies in the technology and consumer sectors.
• This offset the adverse contribution from the financial (underweight) and utilities (overweight) sectors in China.
• We have also took some profits in the Technology space in Taiwan.
• In the short term India could also underperform but the fundamentals remain healthy.
• In 2015, as last year and besides external factors like the dollar, the oil price, monetary policy in the developed countries and geopolitics, local politics and reform expectations will remain critical drivers of divergence in stock-market performance and in earnings expectations.
• We therefore remain prudent in our overall allocations, remaining focused on quality and sustainable growth in our stock selection, while continuing to pay attention to risk through a well-diversified portfolio.