Jan 23, 2013, 03.58 PM | Source: CNBC-TV18
In an interview to CNBC-TV18, Bill Maldona of HSBC Global Asset Managementgive his views on the emerging markets (EM) in Asia.
Bill Maldonado (more)
CIO- Asia Pacific & Global CIO- Equities, HSBC Group |
"They (India & China) are quite cheap relative to developed markets and relative to history, but they are also quite profitable and that is creating some very interesting opportunities within emerging markets. China and India have very interesting dynamics. So, that is attracting lot of attention and beginning to attract flows," he adds.
Below is the edited transcript of Maldona's interview to CNBC-TV18.
Q: There has been lot of talk about how global liquidity is completely awash and how the interest in Asia- India and China is extremely high. Do you sense that there are more people wanting to take exposure in these markets?
A: I definitely think so. We finished last year and started this year on a much more positive note. I think three big macro concerns that were hanging over us in terms of European situation, the US fiscal cliff and the potential for a big China slowdown, have all got much better.
People are much more comfortable that the tail risk of those events is not going to be a significant factor for investing this year. People are beginning to reassess their exposure to equities globally and in the region here in Asia. There are some particularly interesting opportunities and therefore, we begin to see a lot of interest yet to convert into action particularly, on actively managed products. That is coming and the interest is definitely there.
Q: We also hear that hedge funds and country dedicated funds are not getting that much allocation but it is global emerging market funds, which are increasing their exposure to markets like India, China etc. Is that true?
A: I think that is right. The way we look at it is that we think there is a very strong relationship at a corporate level, at a sector level, at a market level between profitability and valuation. There is a very fundamental theory that tells us that this is right and intuitively makes sense to all of us. We are seeing that emerging markets in general are presenting very good opportunities in terms of that profitability versus valuation tradeoff. This means that they are quite cheap relative to developed markets and relative to history, but they are also quite profitable and that is creating some very interesting opportunities within emerging markets. China and India have very interesting dynamics. So, that is attracting lot of attention and beginning to attract flows.
Q: How much of this trend is because of a gradual conversion or flow of money in the US from bond or fixed income related products to the equity side, a trend which seems to be picking up?
A: Fixed income has had a strong run. Bond products have had a strong run. The past year, 2012 was a great year for fixed income investors with double digit returns that is very unlikely to be repeated in 2013. Although the economic environment is still relatively benign for fixed income, there is no real reason to panic, inflation is under control, growth is still somewhat subdued, corporate balance sheets are in good shape and there is lot of cash on those balance sheets.
It is unlikely that the performance will be repeated again simply because mathematically it is very difficult to see how yields and spreads compress again in 2013 to deliver double digit returns. So, in an era of financial repression, interest rates below inflation are negative interest rates. Investors have to think about protecting their investment, protecting the purchasing power of what they have and increasingly the realisation is there that without some exposure to equity assets or other risk assets, it is going to be very difficult to deliver a positive return. So, that is what is driving it. It is beginning a change from the situation that we saw last year and in the second half of 2011. So, it is not in full flow, but we can definitely sense it coming.
Q: Do you expect to see large-scale risk-off through the months of February and March, months which are important for the US markets and the fiscal deficit discussions over there because the fear here is that exchange-traded funds ( ETF ) flows tend to be more fecal in nature.
A: I think there is definitely a risk of that. However, the noise coming out of Washington is that the deal on the debt ceiling has been rather positive. So, there is always the risk that the market gets very wound up and very caught up in the debt ceiling negotiations. Ultimately, ofcourse we know that the outcome has to be that the debt ceiling has to rise. Infact, in 1995-96, we had a very similar situation, Larry Summers was then Treasury Secretary and the government went into shutdown. It stopped paying wages and the shutdown was for 30 days. The question will be, if that happens, which is not our central assumption, but if that kind of outcome happens we’ll have to see whether the market looks through it and believes that this is going to create opportunities. We know what the outcome has to be in the end, we are going to look through it. We will see. It is not our central assumption but ofcourse, anything is possible.
Q: What is the risk that despite all the positives that you mentioned, the global investors are getting too complacent about the tail risk having receded completely?
A: I do not think is a big risk at the moment. We are coming off an environment where tail risk was everything. We were all hanging on to every last word of politicians and policymakers in the US and in Europe. There was a period of time during 2011 and 2012 when we all knew when the next finance ministers’ meeting was in Europe. We were following these events with minute scrutiny and the environment has changed from that. However, we are still a long way away from complacency and all the discussions that we have with investors, with institutional investors, with high net worth or even retail investors shows that there is still a great degree of concern, a great degree of worry. I think we are very far yet from reaching that complacency level.