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Emerging markets: pricing in inequality

HK_protestorsAs protesters continue to take to the streets in many countries across the globe, one risk that is not being priced in is inequality, according to Gustavo Medeiros, a fixed income portfolio manager at emerging markets specialist Ashmore Group.

“Inequality is the big issue that we’re going to have to grapple with over the next ten years in terms of causing volatility and concern, basically because of the way the system is anchored today,” he says.

Not only was inequality the root cause of the 2008 mortgage debt crisis, Medeiros says, but it is also a driving force behind demonstrations in many emerging markets countries, from Lebanon to Bolivia.

In Lebanon, for example, where people have been taking to the streets since October last year, bond prices are at 30% year-to-date following a mass sell-off, while the index is up around 12%, according to Medeiros speaking to Funds Europe in December.

A lot also hangs on US politics, especially with an election on the horizon next year where the inequality issue could also play a key part, he says. “Inequality is going to be a very strong force for people and how policy decisions are made across the world. That’s going to start becoming a reality in 2020 with the election in the US.”

The outcome of the US election could have a trickle-down effect on emerging markets. If the government swings to the left, it would have a very strong impact in terms of capital flows, which could cause a spike in volatility – though Medeiros says volatility tends to create opportunities for active investors.

“At some point, when enough [volatility] is priced in, you can take the opportunity to buy some exposure.”

From our December Issue:

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