Emerging market equities have been under significant pressure this month, sustaining a 7% decrease during October. In the short-term, this pressure is set to continue as global growth and regional and local issues become exacerbated by strong U.S. growth. The building of challenges in South Africa, Venezuela, Brazil and China all have the potential to deteriorate over the next few months. Include the challenges surrounding Italian banks with the aforementioned pressures, and the next few months look trying. There are many reasons for the problems facing emerging markets, but strong U.S. growth, Federal Reserve (Fed) normalization and tough trade policies have only increased the potential for further declines.
The U.S. reports on preliminary GDP this Friday and expectations are for growth to decline from the second-quarter rate of 4.2% to a still strong 3.3%. Despite this expected drop, the Atlanta Fed is expecting a smaller reduction in growth to 3.9%. No matter the outcome for 3Q18 GDP, the continued out performance of the U.S. economy will put pressure on emerging markets.
I continue to be defensive on asset prices in this environment.
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