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Red Star bets on tougher times ahead

The managers of a new equity fund say the big re-rating of Russia is over. It is time for a new type of fund that can prosper in a downturn, they argue. Julian Evans reports.

THE SPRING BLIP has become something of a tradition in emerging markets. For the past three years, the market has come roaring out of the blocks in January, only for something to dent its confidence around March or April. Two years ago it was fears of US interest rate rises; last year it was hedge funds’ problems with Ford and General Motors. This year it was fears of rate rises again – in the US, Japan and the eurozone.

The MSCI fell by about 12% in two weeks in February, with particularly steep falls in the Middle East, where markets were down 40%. Russia, one of the more liquid emerging markets, was also quite badly hit, with a loss of 5% in a day.

But it has also become something of a tradition for emerging markets to recover their vim around June or July, and have a strong – even record-breaking – second half of the year. That’s how it has been for the past few years, as record amounts of institutional money flow into emerging market portfolios, attracted by higher yields and improving macroeconomic fundamentals. The volume of capital flowing into Russia, for example, has never been higher.

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