Utilities, Precious Metals, Real Estate, Canada, France are among the worst

You will be able to download all slides in power point for this report
and all data is available excel



Emerging markets are in the correcting mode. The reasons could be many.. Chinese slowdown Dollar strength Expectations of US rates levels and negative implications for Emerging markets ISIS Ukraine Falling oil price Alibaba IPO It is difficult to say which one is the prime reason of the emerging markets instability, though it is probably the dollar strength which is a reflection of receding risk appetite - a precursor to larger problems. US rates expectations played a leading part on several incidents during the year but the US rates have been falling a month or so as dollar strength exacerbated. Chinese slowdown is a real threat and 81bn$ PBOC bail out of 5 key China banks in September highlighted that sort of the problem. Falling oil price despite of all sorts of the conspiracies can be another consequence of dollar strength. Ukraine and ISIS would have been to the contrary leading oil price higher, although the rumors that ISIS is dumping oil in Syria and Iraq could also explain rapidly falling oil prices. Also quite possible that Alibaba IPO could have been also technically negative for GEM stocks if investors were selling other GEM stocks to take part in Alibaba. Especially given that MSCI can act in November and include the stock into MSCI universe. Although the IPO could not probably drastically affected the dollar price. Dollar strength is a symptom not a diagnosis, the larger problem is yet to materialise whether that problem is in China or in the ISIS. Its also quite possible that doomsday expectations will not materialise, highlighting current flight from risk as just technical. We felt the flight from risk in our universe well (we currently focusing on 7 largest countries by weight - the BIRCS + Turkey + South Korea). MSCI GEM index was down over 7% in September, MSCI Brazil lost 19%, MSCI Turkey was down 12%, Russia down 5.8%, MSCI China -6.7%, MSCI Korea down 8%, S. Africa down 9.5% while MSCI India is down 1.5%. We think that most of the upside remains in oil importing countries, that also have other good economic backdrop i.e. India and South Korea. We are also somewhat positive on South Africa. While Turkey, Brazil and Russia could be the laggards. We are quite cautious of China despite that this has been one of the weakest markets in our universe this year. India is one of the most robust places in the world in terms of economic growth in the past several years. It is also one of the GEM countries where there is enough social conditions for the consumer and infrastructure story to gain more momentum and our favorite sectors in India are consumer staples, services as well as infrastructure. Turkey had a good run this year before it all went wrong as ISIS problems exacerbated and intersected with Turkey' internal problem of Kurdish populations. We still favor Turkish infrastructure and materials. South Africa looks expensive in almost every sector vs. GEM peers. In the sectors where it is cheap the growth is not compelling. We highlight consumer discretionary and technology stocks with a favorable combination of valuation and growth. South Korean stocks are attractive in almost every sector with exception of Energy and Consumer stocks. So financials, technology stocks, consumer discretionary, utilities etc.. are all trading with discount to their GEM peers and are offering higher growth. In China we are worried along side with many investors that a bubble of some kind will burst one day. Chinese stocks are historically expensive but 3 sectors where there is discount to valuation and growth is financials, materials and utilities. Brazil is ready for October 26 run off between Aecio Neves and current president Dilma Rousseff. Markets have cheered to Neves success into the second round, we think that his future success could be a game changer for Brazilian stocks that are otherwise do not have much potential in our view. Brazil stocks that stand out to us on valuation measure are in utilities and healthcare sectors. Russian ruble was in freefall reacting first to sanctions and now to strengthening dollar and falling oil price. But overall so far weaker ruble (despite a paine) was a defensive shot in the arm mechanism protecting domestic Russian economy from the international backdrop. Yukos-2 Sistema case that was another spooky event for investors in September. But recently it has lost the space on front pages of Russian newspapers. Among sectors we like almost nonexistent technology stocks, materials as well as financial infrastructure stocks.