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NYPPEX is bearish on emerging market funds

Laurence Allen, chief executive of NYPPEX, recommended that its clients sell interests in PE funds exposed to countries such as Brazil.

On the heels of recent stock market volatility caused by economic slowdown in China, NYPPEX is advising investors to adjust portfolios exposed to emerging countries.

In a recent message to clients, Laurence Allen, chief executive of advisory firm NYPPEX, suggested that investors reduce their portfolio allocation to emerging markets. One way to do so is by selling fund stakes on the secondaries market, he noted.

Allen said that investors should consider two criteria for their allocation decisions to emerging countries: current account deficits – the extent to which a country has relied on foreign capital to finance its trade deficits – as well as the percentage of exports that are commodities based.

Taking these criteria into account, he believes that Russia, Brazil, Argentina and Mexico are some of the countries likely to be adversely affected, and investors could sell interests in private equity funds exposed to these countries.

He added that such a move might be particularly relevant to investors who may have increased commitments to emerging markets in recent years and are about to see their returns decline due to China’s economic slowdown.

“NYPPEX recommends a significant reduction in private equity portfolio allocations to these emerging countries, based on our belief that China will not restart its commodity purchasing programs for years,” he wrote in a note.

“To illustrate, Brazil’s real currency has declined approximately 34 percent in the 12 month period ended September 1, 2015, which has caused Brazil’s central bank to increase overnight interest rates to 14.25 percent to offset expectations for inflation.”