Fund managers overweight on emerging mkts. But then... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Fund managers overweight on emerging mkts. But then... 

A  A  A

In this issue:
» Two superstars warn against high US debt
» Bengal's communists become more anti-industry
» Real estate projects make a comeback
» US staring at new economic realities
» ...and more!

As per CNN Money, a total of as many as 400 money managers, controlling portfolios worth a whopping US$ 1 trillion believe that the global economy will improve over the next twelve months and hence, 46% of them have become overweight on emerging market equities. Just to put things in perspective, the count stood at 26% in the month of April.

However, it so emerges that money managers do not really have a stellar track record when it comes to investing in emerging markets. While the MSCI emerging markets ETF has given nearly 12% compounded returns over the past five years, the dollar weighted investor returns stood at a measly 1% during the same period. The severe underperformance was attributed mainly to poor timing. Hence, the odds that the timing may be wrong this time around as well are pretty high indeed. Does this mean that a correction in emerging markets is round the corner? Well, only time will tell. But given the way stocks of companies across the board, without consideration of quality, have surged since March, caution needs to be the buzzword.

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As far as India is concerned, a correction looks like a remote possibility or even if it happens, it may not be of a very big magnitude. We say so because the real economic scenario may just get a bit better. And the reason behind our optimism is a story in a leading business daily which says that a clutch of government owned banks may soon lower their interest rates by 1-1.5% after a directive from the finance ministry. It should be noted that Punjab National Bank is likely to be the benchmark in this case as it already has the lowest lending rates in the country and hence may be the only PSU bank that may not lower the rates. All the other banks however may have to toe the line. Finance ministry on its part has maintained that it is not putting any unreasonable pressure on the banks and has been only asking them to do so if they have enough headroom.

Positive news emanating out of the US economy had its rub off effect on Asian stocks as most indices in the region ended the day in the positive. BSE-Sensex, the Indian benchmark also rose the most in a week, edging higher by nearly 4%. All the major European indices are also trading in the positive currently.

While various signals of economic recovery are keeping India upbeat, real estate developers have something more to cheer about. It has been well known that the global financial crisis besides shredding the stock prices of real estate companies to pieces was also responsible for the overall slowdown in the sector. Buyers simply refused to purchase and chose instead to wait on the sidelines for prices to correct to more reasonable levels. Real estate developers had no choice but to bow down to plain economics.

In response, besides slashing prices of their properties by 20% to 30%, many of them started focusing more on middle income housing to give a much needed boost to volumes. And this strategy seems to have paid off. As reported in a leading business daily, buoyed by the encouraging response from home-buyers for their marked-down properties, companies such as DLF, Unitech, HDIL, and others have lined up housing projects of over 60 m square feet; all in the current financial year. What is more, this is more than double the sales bookings in the past financial year. Of course, this has come at a price as developers will have to contend with lower margins. But overall, there seems to be respite for the real estate sector and the surge in stock markets is a bonus that the developers are welcoming with open arms.

It's not just the Indian economy that has something to cheer. As per reports that poured in yesterday, US consumer confidence stood at its highest level in the month of May and also posted the biggest one month jump since April 2003.

The reading comes as a big relief as the US consumer is not only the engine of the US economy but also plays a key role in determining the fortunes of the export led economies of quite a few Asian nations. However, this does not mean that the contraction in the US economy has come to an end. At best, it may indicate that the magnitude of decline has come down a bit.

Aggrieved by their failure in national politics given the outcome of the 2009 General Elections, India's communists now plan to limit land acquisition for industry in their heartland i.e., West Bengal. This is given their understanding that the election loss was on account of voters' anger over seizure of fertile farmland by companies setting up manufacturing facilities in the state.

Whether or not they had the wherewithal to form a government at the Centre, the communists have had a very clear agenda all this while " to oppose reforms and economic development. And given the humiliation they have been handed over in their own backyard, they were only expected to get down to their dirty ways. And so they have! As someone rightly quipped last year " "The CPI (M) was founded in 1964, and is dumbfounded in 2008!" And now in 2009!

One is the superstar of bonds, the other the superstar of equities. We are talking about Bill Gross and Warren Buffett respectively. Both believe that the level of outstanding debt as a percentage of US GDP will drive its rating down. As reported by Bloomberg, Mr. Gross says, "The U.S. has...deficits of 10 percent (of GDP) annually as far as the eye can see. That means that at some point over the next several years, it may approach 100 percent of GDP (in terms of debt), which is a level at which country downgrades tend to occur." As reported by CNBC, Mr. Buffett says, "A country that continuously expands its debt as a percentage of GDP, it's going to inflate its way out of that debt." Clearly, the mounting debt is worrying some of US' most astute financial minds.

Besides the depreciation in its currency, the US perhaps will also need to start worrying about its economic growth. For if some experts are to be believed, the era of 3% economic growth in the world's largest economy could well be behind us. CEO of Pimco, world's largest bond fund had this to say, "A year from now the market will realize that potential growth for the United States is no longer 3 percent, but is 2 percent or under". While another expert, David Rosenberg opined that we better lower our expectations and get ready for a shift from spending to savings. "This is isn't some flashy two-or three-quarter deal. This is a secular change in household attitudes", is how Rosenberg, the former chief economist of Bank of America chose to put it across.

Another economist, Nouriel Roubini or 'Dr. Doom' as he is often called these days was even more sarcastic. As he says, "People like to talk about green shoots. All I see is a lot of yellow weeds." Clearly, looks like the US has some really big problems on its hands.

04:44  Today's investing mantra
"The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do. For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments" - Warren Buffett
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1 Responses to "Fund managers overweight on emerging mkts. But then..."

Anup Pandey

May 27, 2009

Iam kinda impressed by your analysis and the way you simplify things...good dude...keep it up...

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