What next for Markets?

Market optimism faded after a bailout for €10bn was hashed together on Sunday evening.   The second largest bank in Cyprus takes the fall and as expected the Eurozone remains intact (for now).   Whilst depositors first €100,000 will remain, those holding bank debt and deposits over this amount will likely loose all of their money.  With a huge chunck of the banking system taken out, questions will be asked to whether sufficient available credit to Cypriot people will be made?  The largest bank, the Bank of Cyprus will be restructured and absorb the safe deposits from Popular Bank and whilst this is a relief for many Cypriot nationals, this will almost certainly ostracise both foreign banks and overseas investors for the foreseeable future and presents a cautionary tale for other European countries teetering on the edge of economic turmoil.

Markets reacted positively this morning, bucking the biggest weekly decline in 2013 as risk on appetite crept back into view.  However with uncertainty still in front for Cyprus investors remain uneasy. 

Correlation between global equity markets has quite noticably been diverging as economic recovery shows in certain countries more than others.  This global correlation has been inherent as economic crisis has struck so often in the past 5 years following the credit crisis and last week was a prime example. 

Emerging markets have lagged significantly behind developed equities and whilst risk/reward suggests emerging market equities should outperform, it is not the case.  This is down to a number of reasons; as economic recovery gains momentum, people tend to invest in equities that they know about, from here, smaller cap equities will follow.  Emerging markets have faced some different problems as Russia lost a lot of ground over the past week with large exposure to Cyprus. 

It presents an opportunity for those who wish to increase their equity exposure, in the long run these markets offer significant upside potential and it is where I would invest.  There are a number a excellent emerging maket funds, performance of which had been superb.  First State Global Emerging Market Leaders provides exposure to top companies across these markets however, a more leveraged play would be investing in Russian equities, with historically low PE ratios and a maturing consumer base, this could be a top performer over the next few years.

Check out our Top 10 Funds of the Month for some more investment ideas.