At the start of 2018, we argued that while the economic outlook was strong, the certainty of rising short-term interest rates will have implications for the relative valuation of all asset classes. This implied that for equity markets, P/E multiples will need to fall, and consequently price returns will be less than earnings growth. For fixed income markets, this implied that long duration bonds will perform poorly, but credit spreads are likely to remain stable. 

Many emerging equity markets are now in bear market territory, having tumbled by 20% this year. A number of currencies reached historic lows, while external bond spreads widened. Such sell-offs often offer opportunities to investors. But to understand whether the current sell-off represents such an opportunity, it is important to understand the causes behind it.

A less hospitable external environment

The Shanghai stock exchange is down almost 15% this year, shortly after much-touted measures of opening-up to foreign investors.  The Chinese yuan has depreciated. Trade tensions following the announcement of tariffs by the Trump administration continue to escalate.  These developments have taken a toll on other emerging markets, making emerging market equities one of the worst performing asset classes this year.