The Month Ahead…

Cameron Brandt, EPFR Director of Research, reflects on how he sees December unfolding:

Europe will again be front and center during December as investors pull back from riskier asset classes to an even greater degree than usual ahead of the end-of-year holidays.

• While country risk will dominate the headlines, with the UK, Italy and France and Russia the most prominent from that perspective, the European Central Bank’s Dec. 13 meeting will have the biggest impact on sentiment towards Europe. The ECB is set to announce the wrapping up of its current asset buying program by year’s end. Without that safety net, the costs of Italy’s fiscal defiance could multiply rapidly and the climate for reform in France will become even less hospitable.
• Recent outflows from Bank Loan Funds, generally viewed as a good option for playing rising US interest rates, suggest that investors are increasingly worried about credit quality and liquidity mismatches. With trading in many asset classes thin during the holiday season, look for increased volatility in US markets during December as investors respond aggressively to events – significant downgrades, bankruptcies, etc -- that seem to confirm their fears.
• Investors are seeing value in emerging markets. Their preference, which will be even more marked going into the New Year, is for markets such as China, India, Brazil and Korea where domestic investors provide significant support. Brazil Funds are likely to see a spike in flows as investors position themselves for the flurry of market friendly reforms that president-elect Jair Bolsonaro is expected to announce (if not enact) when he assumes office New Year’s Day.