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UBS AM asset allocation head: the EM sell-off is not another taper tantrum

UBS AM asset allocation head: the EM sell-off is not another taper tantrum

Erin Browne, head of asset allocation at UBS AM, does not believe the emerging market sell-off is the start of another phase of the sector’s underperformance, according to her latest commentary. 

She wrote: ‘During the taper tantrum, an index of emerging market currencies fell nearly 8%. In contrast, the dollar index, which is heavily weighted toward the euro and JPY, along with a few other developed market currencies, actually weakened by 2% versus these currencies over the same time period.

‘But in the most recent period of emerging market stress, the developed market currency focused dollar index and emerging market FX have traded almost exactly in line.’

This suggests that as long as the US dollar stabilises, emerging market pressures should subside.

China’s growth slowdown is also set to happen gradually, unlike in 2015 when the country’s nominal GDP fell as low as the levels previously seen in 2008 and 2000. The country has now adopted a more balanced approach to deleveraging.

Browne also considered that investors are now much better compensated for taking emerging market risk, unlike during the taper tantrum.

She wrote: ‘These considerations suggest that the current sell-off is not the beginning of a prolonged period of EM weakness. Still, one must recognise that there are significant risks in the current environment.’

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