Correction could be bit deeper in India: JF AMC
Geoff Lewis, Head of Investment Services, JF Asset Management, comments that inflation is an issue for the Indian markets and nobody's pulling out. He opines that correction could be a bit deeper in India.
Lewis says that hedge funds have reduced net equity positions and that the correction could last for another six weeks.
JF Asset Management states that the US economy's outlook is uncertain due to the lower risk appetite. He adds that a soft-landing is seen in the US despite subprime issues and weak data.
Lewis says that hedge funds have reduced net equity positions and that the correction could last for another six weeks.
JF Asset Management states that the US economy's outlook is uncertain due to the lower risk appetite. He adds that a soft-landing is seen in the US despite subprime issues and weak data.
An interview with Geoff .......
Q: How do you sense the global situation, or rate the global situation right now because it seemed a bit uncertain over the last few weeks? What are the cues you are picking up from the US?
A: Basically, we are still ultimately in the soft-landing camp, but I think things like the sub-prime lending crisis coming to a head and some rather weak US data have made the economic outlook for the US economy rather more uncertain of late. This uncertainty is leading to a reduction in risk appetite and to a period of correction in the global equity markets.
Typically, corrections last about six weeks and involve 5-10% fall in the developed markets and maybe 15-20% fall in the global emerging markets. So we think there is a further period of consolidation and correction to come, but this a growth scare, not an inflation scare; I think an inflation scare at this point would be more damaging to the market outlook.
Q: Has this uncertainty led to any kind of major redemptions in the region or lots of investors trying to pullout or sell out their emerging market investments?
A: So far the scale of the outflows has been relatively limited and compared to what we saw in the correction in May-June last year, a lot of people are looking for maybe a relatively shallow correction in terms of how long it lasts. It could be a longer phase of consolidation - that would be welcome. Either the time or depth of the correction, can lead to overvaluation and remove some of the froth in the equity markets.
The hedge funds have already reduced the equity exposure quite considerably. The retail investor puts some pressure towards the end of these corrections and you get some redemptions from mutual funds. But so far it has been on a very limited scale on this occasion.
Q: How much more are you expecting by way of risk adjustment then for the emerging markets? Do you think with that fund outflow situation, it will be the emerging space that will be hit the hardest?
A: A lot of global strategists are recommending a more cautious attitude and maybe a period of neutrality, or some underweight in emerging markets space. A lot is going to depend on the outlook for the US economy.
We are relatively optimistic that three to four periods of sub-trends and the 2-2.5% growth will remove the inflation threat and enable Fed to start cutting interest rates in the second half of the year.
With growth being very firm in Asia, for example, and also in some of the other emerging market areas, on a 12-month view, the outlook for emerging markets according to me, is pretty good and what encourages me is the deeper correction seen last year.
The scale of the selling from some of the new investors in BRIC funds like the Japanese investors was not as much as it might have been.
Q: Tactically, then at this point, in a situation where there might be a soft-landing for the US, where fund flows are quite if not viciously getting pulled out, how would you approach the emerging markets? Is this a buying opportunity or is it not yet?
A: I think rather not yet; we have to wait for the other shoe to drop, as we are still in a period of weak US growth; so the activity numbers are likely to disappoint in the first half of this year and we have not seen enough of a correction yet; so on a tactical basis I would advice to wait a little bit.
What we have seen is that for most investors it doesn’t pay to try and time these funds. If you just return through the volatility of May-June and did nothing and remained invested over the following six months on a broadly diversified portfolio of outfunds, you would have returns plus 12%. In the three months including the correction, you would have lost 2%; so it pays to ride through the volatility more often than not.
A: Basically, we are still ultimately in the soft-landing camp, but I think things like the sub-prime lending crisis coming to a head and some rather weak US data have made the economic outlook for the US economy rather more uncertain of late. This uncertainty is leading to a reduction in risk appetite and to a period of correction in the global equity markets.
Typically, corrections last about six weeks and involve 5-10% fall in the developed markets and maybe 15-20% fall in the global emerging markets. So we think there is a further period of consolidation and correction to come, but this a growth scare, not an inflation scare; I think an inflation scare at this point would be more damaging to the market outlook.
Q: Has this uncertainty led to any kind of major redemptions in the region or lots of investors trying to pullout or sell out their emerging market investments?
A: So far the scale of the outflows has been relatively limited and compared to what we saw in the correction in May-June last year, a lot of people are looking for maybe a relatively shallow correction in terms of how long it lasts. It could be a longer phase of consolidation - that would be welcome. Either the time or depth of the correction, can lead to overvaluation and remove some of the froth in the equity markets.
The hedge funds have already reduced the equity exposure quite considerably. The retail investor puts some pressure towards the end of these corrections and you get some redemptions from mutual funds. But so far it has been on a very limited scale on this occasion.
Q: How much more are you expecting by way of risk adjustment then for the emerging markets? Do you think with that fund outflow situation, it will be the emerging space that will be hit the hardest?
A: A lot of global strategists are recommending a more cautious attitude and maybe a period of neutrality, or some underweight in emerging markets space. A lot is going to depend on the outlook for the US economy.
We are relatively optimistic that three to four periods of sub-trends and the 2-2.5% growth will remove the inflation threat and enable Fed to start cutting interest rates in the second half of the year.
With growth being very firm in Asia, for example, and also in some of the other emerging market areas, on a 12-month view, the outlook for emerging markets according to me, is pretty good and what encourages me is the deeper correction seen last year.
The scale of the selling from some of the new investors in BRIC funds like the Japanese investors was not as much as it might have been.
Q: Tactically, then at this point, in a situation where there might be a soft-landing for the US, where fund flows are quite if not viciously getting pulled out, how would you approach the emerging markets? Is this a buying opportunity or is it not yet?
A: I think rather not yet; we have to wait for the other shoe to drop, as we are still in a period of weak US growth; so the activity numbers are likely to disappoint in the first half of this year and we have not seen enough of a correction yet; so on a tactical basis I would advice to wait a little bit.
What we have seen is that for most investors it doesn’t pay to try and time these funds. If you just return through the volatility of May-June and did nothing and remained invested over the following six months on a broadly diversified portfolio of outfunds, you would have returns plus 12%. In the three months including the correction, you would have lost 2%; so it pays to ride through the volatility more often than not.
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