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Chatfeild-Roberts spooked by emerging market inflation threat

Chatfeild-Roberts spooked by emerging market inflation threat

Citywire Selection manager John Chatfeild-Roberts has reduced his exposure to emerging markets across his Jupiter Merlin portfolios.

Chatfeild-Roberts (pictured) and his co-managers Peter Lawery and Algy Smith-Maxwell put the repositioning of their five funds – Balanced, Conservative, GrowthIncome and Worldwide, together worth almost £10 billion – in the context of on-going quantitative easing from the Federal Reserve.

‘The unintended consequence of the policy was that some of the liquidity found its way into emerging market economies,’ commented Chatfeild-Roberts. ‘This stimulated borrowing, resulting in their living beyond their means and becoming dependent upon external capital to support their imprudently large budget deficits.’

One result of these deficits has been a depreciation of emerging market currencies, with for example the Indian rupee tumbling by 13.5% against the pound and the South African rand by 14.6% over the past year.

This in turn had stirred inflationary pressures in emerging markets, which Chatfeild-Roberts viewed as a short-term negative but potentially a long-term boon.

‘Inflation is once again rearing its ugly head in these areas, which is a distinctly unwelcome turn of events in the short term, particularly as many emerging markets are suffering from a cyclical slowdown,’ he explained.

But Chatfeild-Roberts also contended that ‘inflationary pressure is ultimately what is required to force countries such as India to put much needed structural reforms in place’. He concluded that such developments would in time prove ‘very favourable to equity investors’.

Where the Merlin portfolios have retained weightings to emerging markets, it has been through large and defensive funds such as First State Asia Pacific Leaders and Newton Asian Income.

He used the proceeds from his emerging markets disposal to increase exposure to the UK and US 'at the margin', while bond exposure has remained at 'reasonably low levels whilst the UK and US yield curves continue to steepen'.

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