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Why we are watching commodities and emerging markets

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Mark Harris (pictured), Head of Multi Asset, City Financial on upcoming tactical opportunities in Emerging Markets…

We continue to believe that the overarching environment is one of ever present disinflationary threats due to the ongoing debt overhang and the ambition of many constituencies to delever. The global economy is desynchronised and countries appear to be caught in mini cycles of growth improvements which fail to sustain due to deep and unexplained structural impediments.

Many developed equity markets have moved to 'rich' valuations for the expected level of earnings growth. Many companies are now at peak margins, with weak sales outlooks, which leave them vulnerable from a forward looking earnings and valuation perspective.

A number of Emerging Market equities and currencies have now suffered a full blown bear market correction. Given the extent of the bad news, they have now become extremely sensitive to a marginal positive change. Whilst we are cautious of the longer term dynamics, a tactical opportunity for significant rewards may be about to present. We hope to participate should the necessary catalysts fall into place.

Looking forward, we expect US dollar strength will reverse into a trend change of dollar weakness in the last quarter of 2015. The long US dollar is one of the most crowded trades in markets with any unwind likely to be violent and sustained.

With nominal rates falling, lots of evident political issues, market shocks and high levels of pessimism, the longer term conditions have now turned decidedly more supportive for most commodities. As and when the US dollar starts to weaken, commodities should start to reward

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