After several poor months, emerging markets only modestly underperformed the US in September, although the performance of individual markets varied greatly. India was broadly flat, partly because it's far less exposed to the commodity downturn than many of its peers, while Brazil was down by 15% in sterling terms as the political fall-out from its corruption scandal worsened and calls for President Dilma Rousseff to be impeached grew.
We're optimistic about emerging markets, including Brazil, on a long-term view, although the risks are high and they will always be volatile. The MSCI Emerging Markets index trades on 10.5 times forecast earnings attractive relative to most other global markets.
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However, inflation remains very low(the UK consumer price index was unchanged in September compared to a year ago), meaning that real (inflation-adjusted) returns on cash are relatively attractive compared to many other assets at present. Investors should continue to hold part of their portfolio in cash and seek out the highest rates they can get, by making the best use of fixed-term deposits, regular saver accounts, and the high-interest-paying current accountsthat many banks are offering to attract new customers.
US junk bonds posted a fourth successive month of losses, the first time that's happened in more than two decades. We don't believe this represents a good opportunity to buy into high-yield debt: spreads are likely to continue to increase and defaults rise as the bond-market excesses of recent years unwind.
Investors should limit their bond holdings to a small allocation of the safest government bonds, which are likely to perform well during a crisis, and not be tempted into chasing higher yields in an asset class that is still overpriced.
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