Will the hot trades be stuffed like Turkey?

We have some troubling news to report from here in Edinburgh. Last week, we were horrified to glimpse the first Christmas tree of 2018. In September. And while it’s certainly too early to begin fretting about Christmas, it’s not too soon to worry about Turkey (forgive the gratuitous pun).

After all, investors in Turkish equities (and bonds) have had good reason to fear their goose was cooked. Successive events have chipped away at investors’ confidence – namely fears of authoritarianism and the fallout from a diplomatic dispute with the US. The market’s reaction has been brutal: Turkish equities have halved, in sterling terms, from their January high.

The troubling thing to note is that Turkey is by no means an isolated case in having incurred the ire of the Trump administration. Domestic politics is also causing strife in other emerging economies such as Brazil and Mexico. Across the board, emerging markets are struggling to cope with rising US rates, the robust dollar and anxiety about trade.

The bubble, then the squeak

The fallout from an emerging market rout shouldn’t be underestimated. Consider equities in a global context: the Nasdaq index has set (then exceeded) new highs, while the S&P index has passed its longest ever bull run by some measure. That surge has been driven by a narrow set of stocks – the ‘hot trades’ that have been climbing for a number of years.

We’ve written before about these hot trades – the technology companies whose values have reached stellar heights. Of the so-called FANGs clique, Apple won the race to be the first company with a $1 trillion market capitalisation, with Amazon hot on its heels. The BATs (Baidu, Alibaba and Tencent), the Chinese equivalent of the FANGs, have been another hot trade. This is beginning to look a lot like an asset bubble. Perhaps a reassessment of risk in light of the emerging market sell-off will be the trigger that causes investors to squeak.

In that scenario, where will investors cast their eye? As contrarians, we see a good chance that investors will turn from hot trades to value stocks. A switch from excess to value – there might be a Christmas lesson in there after all.

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this blog should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.