- We have c200 basis points of gross exposure to the Energy sector in the Fidelity Global Emerging Markets strategy. As a result, along with evaluating the direct exposure to energy stocks, we need to consider second/third order effects.
- Certain emerging markets (EM) currencies are clearly likely to depreciate given their exposure to global trade and oil exports. EM currencies also act as proxies for risk sentiment and thus will sell off in periods of market decline.
- The EM currencies most exposed are the Russian Rouble, Mexican Peso, Brazilian Real and South African Rand. Middle Eastern equity exposure is also directly impacted as the Middle East operates a fixed currency peg.
- The portfolio has c6% exposure to Russian equities, 2% exposure to Mexico and 7% exposure to Brazil. Russian exposure is the most at risk of declines due to the direct impact on the local economy of a lower oil price.
- We are invested in businesses with robust balance sheets which are not at risk of default or liquidity concerns. We also have two thirds of our Russian exposure in exporters which will benefit economically from a lower currency.
- Our Brazil exposure is in domestic facing best-in-class businesses which have operated through difficult currency environments in the past and have a proven ability to come out of such environments on a stronger footing.
- We have no exposure to Saudi Arabia or the Middle East within the portfolio.
- The portfolio has significant exposure to countries which are net importers of oil. Over the long-run these economies will benefit from a lower oil price environment once the current concerns on a global supply and demand shock have subsided.
- Stock correlations within EM tend to increase in market dislocations such as these, given the Second and third order effects of liquidity concerns, foreign exchange devaluations and the need for market participants generally to reduce exposure to risk assets. Such an environment does create opportunities for long-term investors who follow a prudent, disciplined approach to risk management.
- The current oil price environment should be viewed in the context of other challenges facing the global economy as a result of the supply and demand shocks created by COVID 19 and the knock-on implications to global debt markets.
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