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Investors are terrified by the 'Third Wave' of the financial crisis

Nov 30, 2015, 13:44 IST

Big-wave surfer Garrett McNamara drops in on a large wave at Praia do Norte, in Nazare December 12, 2014.REUTERS/Rafael Marchante

FTSE 100 money manager Aberdeen Asset Management released its final results on Monday and the big takeaway is that investors are terrified by the possibility of an Asian and emerging market crash.

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First, the good bits: Aberdeen's revenue is up 5% to £1.16 billion ($1.74 billion), underlying profit is up £1.3 million ($1.95 million) to £491.6 million ($739.1 million), and dividend raised by 0.75p to 12p.

But there's a glaring red mark on Aberdeen's homework - assets under management fell by almost 10% to £283.7 billion ($426.5 billion), "reflecting negative sentiment towards Emerging Markets."

The money manager had clients pull a whopping £33.9 billion ($50.9 billion) out of accounts in the year and the main reason was a growing fear that emerging markets are about to go down the toilet, fast. HSBC and Goldman Sachs are among the banks sounding off the most high-profile warnings.

It's not just Aberdeen feeling the pain. The company says that for the equities business, the final three months of the year were "the worst quarter for outflows from this asset class since the global financial crisis" across the industry.

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That's a huge, flashing warning signal.

Investors have had jitters about Chinese growth figures for a while now and the country's "Black Monday" stock market crash over summer sent many running to the hills. More mixed economic data from the powerhouse since hasn't helped things.

A Chinese slowdown has knock-on effects for other emerging markets given just how much raw material China has hoovered up over the years. Its voracious appetite has helped support plenty of economies.

Meanwhile, the private sector in many emerging markets has been bingeing on credit for the last decade, while corporations in the western world have been slowing down their debt accumulation, or even deleveraging.

That's led to what HSBC has called a "toxic mix" of debt and low growth in emerging markets. Goldman Sachs' recently dubbed the cocktail the "third wave" of the financial crisis, driven by China's shifting economy.

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Asia is normally a bright spot for Aberdeen and the company is still bullish despite the slowdown, calling it a "a cyclical correction."

CEO Martin Gilbert says in today's statement: "While we believe the current weakness may have some way to run, the long-term fundamental attractions of investing in these high-growth economies remain compelling for patient investors."

Despite this, Aberdeen is touting its three-pronged strategy for navigating the short-term pain associated with being long emerging markets. The company is diversifying its business, hoarding cash to strengthening its balance sheet, and cutting costs.

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