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Current Views

Assessing the Risk of Contagion

Thoughts from our Domestic Equity Team

The past few weeks have seen volatility in the world financial markets as a number of emerging markets are experiencing political and economic stresses and weakening currencies, the most notable being Argentina and Turkey, though significant challenges are visible throughout much of the developing world. China had the specter of a shadow banking crisis arise with the impending maturity of a $500 million high yield trust at risk for default at the same time that the HSBC/Markit Flash PMI, an indicator of activity in the Chinese manufacturing sector, unexpectedly signaled a contraction, suggesting that growth may be slowing in the world’s second largest economy. And the Federal Reserve’s decision to continue tapering its monthly asset purchases, though rooted in its confidence in the sustainability of the US economic expansion, may exacerbate these risks by reducing a source of liquidity that might otherwise be supportive for emerging markets.

Like many investors, we are monitoring these developments and trying to gauge how severe this market correction may turn out to be. In our view, China poses the most serious risk given its size and influence on the global economy. The recent news of a possible bail out for lenders to the high yield trust shows that China may act preemptively to try and assuage market concerns about its $5 trillion shadow banking market, presumably while it pursues longer-term reforms to better address the root causes of this weak link in its financial system.

Beyond China we note that the US market has continued to appreciate over the last few years despite recurring episodes of structural issues in emerging and developed markets. We expect this year to be no different with the market driven higher by accommodative policy at the Federal Reserve and other global central banks, acceleration in the US economy as the federal budget eliminates the fiscal drag that we have experienced in prior years, and equity valuations that we believe can sustain or grow higher if interest rates rise in a slow and steady fashion. Finally, we believe various technical market indicators suggest that the current correction may be nearing its conclusion as these metrics are approaching the levels seen in prior pullbacks.

Nevertheless, the emerging market slowdown is at risk of impacting the developed world, including the US, by exporting deflationary pressures, at a time when developed economies are already struggling with disinflation. In light of this risk we are taking the opportunity to consider adjustments in our investment portfolios, including the trim of certain positions that, in our view, may fall under the following conditions:

1) Possess a relatively high correlation to emerging market equities and currencies
2) Behave sensitively to US market movements
3) Occupy a position size that is slightly ahead of our conviction level at the current price.

 

Submitted by: Jason Sheer, CFA and Jason Benowitz, CFA



This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages domestic equity, international equity, domestic fixed income, global fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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