Although oil prices and many commodity prices have fallen in recent days, they are still at historical highs. Unless energy and commodity prices fall sharply, the government will still worry about inflation.

In the financial market, under the situation of uncertain global economy, risk aversion and high volatility are still common characteristics of financial assets. Generally, during the economic downturn, investors tend to invest in bonds, but recently the inflation rate has been higher than the bond yield. If the inflation rate continues to rise, it will be detrimental to bond returns.

Although the outlook for commodities is slightly optimistic, the current valuation is still slightly expensive, and high prices have begun to hit market demand. Therefore, we predict that commodity prices will be difficult to continue to rise in the context of slowing global growth. The relevant share prices are currently at a low level, but the market needs more positive earnings and growth information to get back on track.

In the current investment environment, investors hope to minimize risks and win in stability. The "market neutral strategy" can be said to be the first choice for investors, because its characteristic is to achieve returns without being affected by the market environment - in fact, no matter what the investment environment, investors should include some neutral strategies in the portfolio.

A simple market neutral strategy is to grasp the "positive" advantage of emerging market performance over developed markets. Since the emerging market economy and enterprise development momentum are stronger than those of developed markets, the performance of emerging markets is generally better than that of developed markets. In the past two decades, if the MSCI (the investment target most commonly used by global portfolio managers) emerging market index and MSCI Global Index were taken as the comparison object, it would be found that emerging market shares recorded an average annual growth of 10.4%, while developed markets only recorded an average annual growth of 5.5%.

The distinction between the two is more obvious in recent years. From 2001 to 2006, the annual performance of emerging market shares outperformed that of developed markets every year. In the bear market cycle from 2001 to 2003, emerging market stocks outperformed developed markets by about 12% annually. In the bull market cycle from 2003 to 2006, emerging market stocks outperformed developed markets by about 20% annually.

Due to good macro fundamentals, including population growth, accelerated urbanization, domestic demand growth and government and other factors, emerging markets have become a new driving force for world growth. In the past few years, emerging markets have surpassed developed markets in their contribution to world economic growth. We also predict that the GDP growth of emerging markets will reach 6.8% in 2008, much higher than the 1.6% of developed markets, and the GDP growth of emerging markets and developed markets will also reach 6.3% and 1.5% respectively.

It can be seen from the attached table that although the economic growth rate of emerging markets and developed markets is expected to slow down in the next five years, the growth rate of developed markets will slow down faster than that of emerging markets. The growth "premium" of emerging markets will also bring investment opportunities for investors in bull and bear markets.

Therefore, investors can jump out of the traditional investment strategy and use the neutral strategy suitable for both bull and bear markets to benefit from the growth "premium" of emerging markets. The market neutral strategy refers to taking a long position or buying an asset with better performance, while taking a short position or selling an asset with less performance, so as to profit from the difference between the two prices.

The advantage of structural products is that they can take long short positions, so as to achieve absolute returns for investors, that is, they have opportunities to profit in both bear and bull markets. According to the current market conditions, investors can hold long positions in emerging market shares and short positions in developed markets, and thus have the opportunity to obtain market premiums due to differences in economic growth between emerging markets and developed markets. Xie Li Wanwen

The author is from France Industrial Bank Managing Director, Derivatives and Structured Products Asia

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