Cautiously positioned on equities for yr-end: Eastspring

The US is yet to resolve its fiscal cliff and global equities are looking out for some tangible cues as the year heads to its end. Nicholas Ferres of Eastspring Investments said they are cautiously positioned at the moment. Going into the year end, Ferres is modest underweight on equity and underweight on US equities. He is also not very hopeful about the Asian and emerging markets as well.
 
On the whole, certain positive developments can lead to a market correction going forward, opined Ferres.

Here is the edited transcript of the interview on CNBC-TV18. Q: How are people playing these last couple of weeks in the year? Do they expect to see some kind of tangible statement from the US in terms of fiscal cliff and that too aiding a rally?
A: My sense is that investors should fight the Fed and fight the Santa Claus rally. We are relatively cautiously positioned; we have got a modest underweight to equities going into the end of the year. We are principally underweight US equities and we are broadly underweight Asian and emerging markets but, we do have some select cyclical exposure. We are overweight Russia and we are overweight global mining stocks also. That's on the bases that we are seeing recovery in demand in China which is helping commodity prices. Q: What is the cautious stance predicated on because the general consensus seems to be that some kind of fiscal deal will be cobbled up over the next couple of weeks?
A: I suspect that's why markets have been rallying already. So my sense is that markets have become a little too complacent over the last couple of weeks in anticipation of that. In addition, last night of course we saw that the Fed enhanced an extension to its quantitative easing programme and essentially maintain the guidance for its monetary policy. So we are cautious on that basis. Q: Do you see a significant pullback of more than 5 percent over the next couple of weeks?
A: It is very difficult to say. The way we characterize global valuations is that equity markets are little cheap. We think cyclical markets are cheap. So we don’t necessarily think there is a significant downside but, my sense is that as I said, investors have become too complacent when you look at indicators like equity volatility and volatility in risky currencies. Those sorts of indicators have collapsed or are very low and they suggest complacency.  We think that even if a positive outcome is achieved, markets might correct a bit on that.
_PAGEBREAK_ Q: Have you anecdotally begun to see that in terms of how the money is behaving though. Have people begun to either redeem or raise cash levels on funds?
A: I haven't seen that in outflows at all but, my understanding from the industry overall is that it’s being relatively quiet. So we have not seen too much movement in terms of positioning. But, just to reiterate the impact of the fiscal cliff could be quite significant.
It is potentially up around 4 percent of GDP in the US and if that did occur, it could knock 20 to 30 percent of US corporate profit. I suspect it has the potential to have a significant impact on the market and that has clearly been very well telegraphed but, where risk assets are trading at the moment, I do not think it’s in the price. Q: What is the tactical call on a market like India?
A: We haven’t had a position in India for a couple of months. I guess we have been neutral. We switched out of India in early September. We made reasonable gains but, missed on the upside since then.
But, what we did switch into is a basket of global mining stocks and we did that via the ETF coal pick, which is a basket of stocks like BHP Billiton, Rio Tinto, Vale, Anglo American and that has performed very well. That is up 15 percent since we added that allocation which has outperformed the emerging markets index, which is up about 9 percent over the same timeframe. Q: What signals are you picking up on China because that has come back on the discussion radar over the last few weeks? Could that be a big asset class to watch in 2013 or you are still skeptical?
A: The way we are playing China is through the global mining stocks. We do that late in August or early September and we believe at the time the basket of global mining stocks that we bought was trading at one time its book value. The second point was that in our observation, people become too pessimistic on the short-term growth outlook in China and since then you have seen cyclical recovery indicators like purchasing manager’s surveys, rail cargo, freight volume, loan growth has started to pickup and property prices for example has been picking up as well.
We have seen a bit of a cyclical recovery. I will be more skeptical about the medium-term growth outlook and I do think that investment will slowdown in terms of trend in China. But, in the short-term the outlook is reasonably positive, particularly if we get through the event in the US. If there was a risk-off episode as a result of that, I will be adding to my position in mining stocks and probably adding other cyclical markets like Brazil and potentially Korea for example. Q: What kind of levels do you expect to see on the dollar index going into next year because that will have a direct correlation with how markets like ours perform?
A: The dollar is on a pretty key level at the moment. It weakened a bit overnight but, it didn’t selloff that much. It might not have been so bad for the borrowers as expected and on the positive side for the dollar as well, I think in the medium-term you have got the improvement in the current account balance in the US from the shale oil and energy situation and also because the US is much more advanced in terms of its recovery process.
At some point, whether it is late 2013 or early 2014, the Fed will probably be starting to either withdraw its monetary stimulus or starting to hike rates and if we see a meaningful improvement in the US labour market next year and the Fed starts to normalize rates in a more meaningful sense then the dollar could strengthen quite sharply.