Hedge fund selling to fizzle out possible rally: Baccardax

Q: What is your sense, have the markets forgotten about the Chinese stimulus package, not really looking forward to G-20 and just focusing back to fundamentals like negative UK home sales data, which is the lowest in 30 years and we are also getting really bad earnings numbers from Vodafone?

A: I think it is a combination of pretty much everything you said, although I would think that Vodafone's numbers in the current conditions are actually perhaps a little bit stronger than the markets had anticipated. And certainly their assumption that they are going to hold on to committed targets is a small bit of good news that we could probably cling to.

But, I think broadly the macroeconomic picture is right back into focus. Today when we have a small 24-hour holiday from that after the fiscal stimulus package announced by China, which it has to remember, is about 17% of China's GDP from an economy that already accounts for about 27% of global activity.

So, it was good not to discount it yesterday. But I think in the cold light of Tuesday makes much more sense to look at full projections for the global economy and indeed the larger economies in the world. They look bleak and ultimately that is part of the reason you are seeing the selling.

I think secondarily to that, any time you get any rally with any kind of conviction, the hedge fund redemption story, which lurks in the background in equity markets pretty much every day, begins to see that as an opportunity to sell, to raise cash to pay back investors. I would imagine that any deep and sustained rally between now and the end of the year will be met by hedge fund selling in order to meet those redemptions.

Q: What is the word on the street on this hedge fund redemption story currently? What are you hearing in terms of hedge funds redeeming from emerging markets?

A: From emerging markets, without question, although the opacity of the asset class i.e. hedge funds makes it very difficult to quantify exactly what sort of numbers we are talking about. But there is no doubt that there is increased chatter with respect to redemptions.

What we are discovering is, emerging markets may not have felt the brunt of that yet largely because of liquidity issues. I think hedge funds have been redeeming into markets that have the highest level of liquidity and I think that is part of the reason why you have seen previously significant downturns in major equity markets such as Nikkei, such as the FTSE, such as the DAX, and those in the US.

Now, once the liquidity situation improves, if it does in emerging markets, then you will certainly see some more selling into that. Even if it doesn't and that is probably the most concerning situation that I would have is that if you have significant and heavy selling and low liquidity, it could cause markets to gap-down. So, investors need to be aware of that potential risk.

Q: Are the markets expecting anything at all from the G-20 meeting? If so, what are they expecting really?

A: I am hearing increased talk of potentially having some sort of coordinated effort with respect to lower interest rates and stimulus packages on a fiscal level from the members of the G-20. But that is extraordinarily difficult to organise I should imagine considering the disparate economic growth patterns that you would have for the G-20 nations, and also for the fact that you would have to get different kinds of support from legislators in those countries as well.

So, the fiscal stimulus side of things might be a little bit difficult to deliver. But what we may see is a harder statement and a pledge on lower taxes, lower interest rates and ultimately efforts to stimulate economies through fiscal policy. But again it'd probably be left up to the individual nations as to what path they would take.