Salient to Investors:
Ray Bakhramov at Forum Global Opportunities Fund said:
- What we have seen so far is just a preview as a bottoming in any asset class typically takes 4 years.
- The combination of slower growth and Fed tapering will accelerate redemptions, triggering a slump for stocks, debt and currencies.
- The jump in interest rates prompted by Bernanke just talking about tapering shows that preventing a further rout in emerging markets may be beyond central banks’ control, especially if developing nations and companies start struggling to fund themselves.
- He is betting against the Chinese yuan
- The September rally shows that people are still complacent that the Fed will take care of every problem, and people are mistakenly in seeing emerging markets as an issue, but not a big issue.
Barclays and JPMorgan Chase say the worst of the emerging-market sell-off may have already passed.
Anthony Lawler at GAM said hedge-fund managers have been looking for something to break, and central banks have been trying very hard to not let anything break. Lawler said the rupee and rupiah, which fell the most after Bernanke first hinted at tapering, have not led to windfalls for hedge funds because they are not liquid enough to bet against in a meaningful way.
Hedge Fund Research said hedge funds focused on emerging markets account for $155 billion of the industry’s $2.4 trillion of assets under management. HFRI said hedge funds broadly gained 3.9 percent through August versus a loss of 12% for the MSCI Emerging Markets Index and gain of 15% for the S&P 500, while the hedge-fund industry had an average annual gain of 4.2 percent from the start of 2007 through the end of 2010.
Stephen Jen at SLJ Macro Partners has been warning that slowing growth and the reversal of capital flows will crush currencies and the worst is yet to come. Jen said only 10 percent of the IMF estimate of $7.7 trillion pumped into emerging markets over the past decade has been pulled, and the Fed has not even started tapering. Jen said sell-side analysts have been too bullish on emerging markets based on the demographic trends, oblivious to the emerging-twin deficits: overextended credit cycles and extreme valuation of both currencies and the underlying assets.
Alper Ince at Pacific Alternative Asset Mgmt says to avoid hedge-fund managers wedded to either bullish or bearish views on emerging markets until there’s more clarity about the effects of Fed tapering and Syria. Ince said emerging-markets underperformance is overdone since May, but it is too early to buy because of so much uncertainty.
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