Jun 21, 2013, 04.20 PM | Source: CNBC-TV18
In India, although, the market has held up a little bit better, there is concern that there is hot money that may flow out of the economy, says Mark Konyn, CEO, CCAM.
Mark Konyn (more)
CEO, CCAM | Capital Expertise: Equity - Fundamental
"EMs will be more vulnerable to this changing expectation environment. Though selling has pretty much been indescriminate across a number of asset classes, economies with current account deficits (CAD), such as India, are clearly going to be much more in the firing line," he told CNBC-TV18 in an interview.
He says there is a view out there that once the market adjusts to potential higher rate of growth in the US and as a result higher interest rates, the growth story will carry US and other DM equities ahead of EM equities, particularly those that have been fuelled by higher commodity prices.
However, the reallocation out of DM into EM is going to be driven by outlook for outperformance and it is going to be market by market, stock by stock, depending on where each individual economy is within its own cycle. In India, although, the market has held up a little bit better, there is concern that there is hot money that may flow out of the economy.
Below is the edited transcript of Mark Konyn's interview with CNBC-TV18
Q: The markets have now started to get used to the fact that eventually this ultra-loose monetary policy will come to an end. How are you adjusting to it? What should the equity market strategy be now? Should you be high on cash? Should you continue to stay invested in risky assets? What is the approach?
A: Markets are never very good at assessing turning points and we are at a turning point. That period of predictability around stimulus measures, whether it is in the US or whether it is in China, has pretty much come to an end. So the predictability has gone, hence we are hitting a turning point.
Markets are not good at assessing them and therefore a lot of money is being pulled back from particularly emerging markets (EM) and anything which is considered to be a high risk asset. In this environment what we have been doing is raising cash levels.
Q: We saw some debilitating falls across asset markets and nobody was spared - developed markets (DM), EM bonds, equities, commodities; every one of them. Hereon I would assume the falls will be more discerning. Which will be the outperforming markets in the next quarter even if all of them fell?
A: You are absolutely right there in the early stages of this recalibration around stimulus measures. As we saw at the end of May, beginning of June it was pretty much indiscriminate selling across a number of asset classes. If we look at fund flows for example in the United States, in the first week of June we saw selling in US equity funds, we saw selling in high-yield funds, in bond funds in general. Pretty much all asset classes were coming under fire and we are seeing that continuing into EMs.
The selling in EMs is likely to continue for longer, because international money is being pulled back from the periphery of where they are exposed to risk. They will consider EM exposure whether it is debt or equity as being much more vulnerable to the changing expectation environment. Economies with current account deficits (CAD) are clearly going to be much more in the firing line.