UniCredit, Italy’s largest bank, sports large amounts of Turkish debt too. At the moment, it’s unclear whether these loans are with strong blue-chip companies or whether they’re more toxic.
To us, it simply underlines the reason we usually steer clear of Europe: its banks are still a mess, a decade on from the global financial crisis, and that’s not the only structural problem the bloc is wrestling with.
The banks we do like are, in the main, American. We own US Bancorp and Northern Trust precisely because of the quality of their assets.
You can never know exactly what a bank holds – they are too gigantic and complex – but these have a long-held reputation for restraint and careful management that we respect. They stick to what they know in markets they understand.
There are still risks in the emerging markets, however. Tightening US monetary policy means there are fewer dollars to go around. And that is typically hardest on developing nations.
Also, if trade is choked off by an escalation in US tariffs it will be trading nations – many of which are emerging markets – that take the largest hit to GDP growth.
We believe there is too much at stake on both sides of the Pacific for China and the US to get into a protracted trade war.
China needs to keep exports flowing and its people employed as it tries to transition to a more services-led economy; the US has become accustomed to cheap prices on everything from mobile phones to microwaves, courtesy of Chinese labour.
We could be wrong, however. That’s why we’ve recently renewed our put contract on the S&P 500. This will protect a significant portion of our equities if the American market corrects.
We don’t expect this to happen though, it’s an insurance policy. We are giving up a little of our returns now so that we can avoid the worst if markets go south.
David Coombs is Rathbones Multi-Asset Portfolio funds manager
