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Alternative Market Briefing

Balance of risks shifting positively, to favor emerging market, Asian assets

Tuesday, March 13, 2018

Komfie Manalo, Opalesque Asia:

The announcement that U.S. President Donald Trump has agreed to a meeting with North Korean leader Kim Jong-un is shifting the balance of risks positively and this has important implications on emerging markets and Asian assets, said Lyxor Asset Management in its Weekly Brifing.

Lyxor AM senior strategist Philippe Ferreira commented, "There is still a long way before geopolitical risk in the Korean peninsula eases materially. In the past, previous initiatives to de-nuclearize North Korea back in the 1990's failed to succeed," but added the meeting between the leaders of the U.S. and North Korea is "is unprecedented."

He cited a recent report published by the Federal Reserve using quantitative methods to conclude that the link between geopolitical risk and both portfolio inflows to EM and stock returns is statistically significant.

Ferreira added, "In our view, such developments have the potential to remove a hurdle to equity returns in EM Asia and allow stock prices to evolve more in line with companies' fundamentals. The softening of geopolitical tensions is taking place at a time when there have been regular upward revisions in earnings expectations. Yet, elevated geopolitical risks appear to have prevented equity indices to reflect it adequately."

L/S equity funds outperform

Overall, Lyxor believes the shifting risk balance should be supportive for EM L/Short equit......................

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