2018 is now behind us and it was a painful year for most investors around the world, across all asset classes. In USD terms, MSCI indices for frontier and emerging markets ended the year with a negative total return of 16.4% and 14.5%, while developed markets corrected by 8.2%. The last quarter gave no relief, as frontier, emerging and developed markets fell by 16.8%, 14.8% and 13.7%, respectively. Red was the colour for the returns of all our strategies for the year, and for the last quarter (besides Turkey, which rebounded slightly, following an abysmal third quarter), which is not something we were expecting one year ago, and which of course makes us disappointed.
As an emerging and frontier markets specialist with more than 20 years of history, we have seen many ups and downs. The current situation is however increasingly frustrating as we often see stock markets plunge, sentiment reverse and many investors rush for exits, for no good fundamental reasons besides an overall risk-averse sentiment fed by dark clouds of uncertainty. The management reports on our strategies for the fourth quarter of the year endeavour to dig deeper into the specific developments of markets, sectors and our portfolio holdings, but might sound a bit like a broken record, as the overall investment environment keeps being best described as “uncertain”.
At the 11th edition of the Asia Financial Forum in Hong Kong, gathering more than 3,000 delegates from 46 countries in early January, participants were surveyed on what they saw as the main source of risks for 2019. The issue of China/US trade tensions came number one, with 77% of the votes, far above monetary policies, Brexit & EU fiscal policy. Arguably Hong Kong’s location might have made the audience more aware about the impact of the spat between the world’s two largest economies, but to me the point is that investors and businesses have become obsessed with this issue to a point of neglecting other sources of risks for markets. This was the case for 2018 and we will probably have to live with it for an extended period of time, as we highlight in our article that wraps up the year and provides our expectations for 2019.
For us at East Capital, the last quarter was also eventful. We took our clients on an exciting investor trip off the beaten track in China, namely Chengdu and Shenzhen, where we met a number of portfolio holdings and key active positions in our funds East Capital China A-shares and East Capital China Environmental.
We also announced an important acquisition in Northern Europe, which helps us gain economies of scale and scope, thereby meeting client demands for cost efficient and sustainable investments. Consolidation within the asset management industry has been taking place for several years, and in our home market of Sweden is also driven by the changes in the Swedish Premium Pension system, introduced as of the end of 2018 as a first step, and heading towards a professionally procured fund platform expected to be introduced in a second step in 2020.
Furthermore, we also prepared ourselves for a fund reorganisation, also in line with client demand, and in order to achieve scalability. This process is now well underway — East Capital Baltics became East Capital New Europe and East Capital Emerging Asia became East Capital Global Emerging Markets Sustainable during the first week of January 2019. In February, East Capital Turkey will be merged into East Capital Balkans.
In the coming weeks, it will be time again for our annual East Capital Seminars, a roadshow across Europe where my colleagues and myself will present our perspectives for 2019 and get the opportunity to exchange views with our investors, something we always look forward to! We do hope that the 2019 backdrop will be less challenging and to see good companies outperform as they should.