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Stock-Markets / Financial Markets 2011 Jan 20, 2011 - 11:42 AM GMT

By: Justin_John

Stock-Markets

Best Financial Markets Analysis Article2011 has started on an unexpected note. Emerging markets have come down and developed markets, like Europe and the US, have scaled up.

It was not entirely unexpected to me because since March 2009, emerging markets have significantly outperformed developed ones and through easy monetary policies in the US, we created bubbles in the emerging economies, particularly in terms of inflation. So, the emerging economies, having this excessive liquidity and high inflation, have to tighten here, or let inflation go and have problems later on. So some money is flowing out of emerging economies.


Since your report ‘Endgame Has Begun’, dated 20 December, came out, Indian equities are down nearly 5-6%, what is your estimate for India and how much more downside do we see?

We are down almost 10% from the peak and will go down on the Sensex to around 16000 at least.

What is your broader call for emerging markets for 2011, buy on every decline or they could underperform?

Yes, they will go down first and then we will have to see what happens thereafter. We live in a very volatile environment and that we have to take step by step. There are no points to predict where the markets will be in a year’s time. From this level, we will move in a trading range. I do not think we will make a new low below the March 2009 low, which was below 9000, but equally I do not think we will go up substantially.

What is not working for India right now? Is it purely the fact that funds are now moving to the developed world because they are the ones witnessing some bit of recovery?

We have high inflation in Vietnam and China. If each of the central banks does not do anything, inflation will accelerate and eventually cause even more problems. If the central banks step in and tighten monetary conditions, it would not be very good for equities.

For 2010, the star asset performers were silver, cotton and copper. Which to your mind are going to be the start asset classes for 2011 and beyond?

I wish I knew, but I think natural gas is relatively inexpensive. In general, entry prices will go up in the next few years. We may have corrections. I do not know which asset class will be the best performing in 2011. I just can give you asset classes that are relatively inexpensive. These would relate to markets like the Middle East, Vietnam and Russia, which is still reasonably good valued. The big move in equity occurred between March 2009 and the end of last year, and in some markets, it was earlier in April 2010. From here onwards, the upward move will be much more difficult

Would you be bullish on commodity-rich economies like Russia, Brazil and Venezuela and hence their stock markets as well?

I do not think I would necessary invest in Venezuela and my concern about commodities and warrants on China, mainly economies that have larger exports to China than to the United States, is that some time in 2011 or 2012, there will be disappointments coming out of China. The most vulnerable assets are assets that are tied to the Chinese economy, precisely like industrial commodities, copper and currencies of countries like Australia and Canada and also their stock markets.

Within the commodity basket, there are three sub-sectors: energy-related commodities, agri-related commodities and precious metals. Which particular subcategory are you bullish on?

For the typical investor, I would look at precious metals. They are now correcting on the downside, but I do not think there is a huge downside risk. I would recommend investors to gradually accumulate precious metals.

Which one is looking stronger to you, gold or silver?

They move in the same direction, and silver is more volatile. Each individual has to decide himself what he prefers – a more volatile commodity or a more steady commodity. I prefer gold for a variety of reasons, but I can see that may be silver will outperform gold in a bull market.

How are you reading into India’s inflationary problem? How should the central bank tackle it?

All central banks in the world will not increase interest rates above the rate of inflation. In other words, they will keep essentially expansionary monetary policy, but it will create more problems and misallocation of capital. So, investors will begin to worry.

Are you a bit surprised with the resilience the US economy is exhibiting and the fact that three months ago everyone had written an obituary for European economies, especially the PIG region, and now it is a carnival feeling out there?

I am not really surprised. In general, the issue is that between 2008 and today, emerging economies have performed very well economically speaking and the rest of the world has not, and therefore, we had an outperformance in emerging economies’ stock markets. Now, the question is emerging economies are very tied to the Chinese economy, and if the Chinese economy slows down or goes into a recession or there is a bubble that bursts in China, before the developed market economies recover strongly, what the implications will be on equities? That’s why I feel more comfortable today to move back some money out of emerging economies into the developed markets.

What are the chances that by the time we wrap up 2011 or beginning of 2011-12, inflation could stabilise for emerging markets or inflation could backfire for markets like the US and Europe?

We have to distinguish, in a country like India and Vietnam where GDP per capita is, say, a US$1000 a year, food and energy are much more important components of personal disposable income than in countries like the US and Europe where it is just a relatively small portion. So, in an inflationary environment, especially for food, energy and commodities, emerging economies suffer for more than the developed economies.

For 2010, crude was range bound, but now other commodities have moved up and crude is still below $100?

Yes. If I were an investor, I would have some exposure to energy. Of course, the price will fluctuate but if I look at the dynamics of demand and supply, over time the demand will exceed the supply because what has happened since 2007 is that in the developed economies, the demand for oil and energy has come down, but in emerging economies, it has continued to grow. However, now the demand is picking up in the developed economies like the US and Europe. So, global oil demand is now reaching a new high above the 2007 levels. Therefore, prices will rather trend upwards than downwards.

What about the dollar index? Where do you see the currency moving?

The dollar is somewhat oversold, and in the past 2-3 months, the sentiment about the US dollar was extremely negative. I would take a rather positive view of the US dollar, not because there is anything good about the US dollar but because the other currencies are no better. My preferred currency remains gold and silver.

What is your view on China because that is the biggest moving part? Chinese markets have done nothing but the Chinese data is absolutely breathtaking?

There are some question marks about the data published by China. My view would be that inflation in China is just about the same level as in India. In other words, it is much higher than what the government is publishing. So, real growth and inflation-adjusted growth is probably much lower than what they published. If you look at the bank lending rate and the deposit rate, we have a very negative real interest rate, in other worlds, interest rate adjusted for inflation. That leads inevitably to some kind of a bubble and every bubble bursts. Now, if you ask me when will the bubble burst, tomorrow or in three years, I do not know. I just say that it is a dangerous situation. Moreover, if you have very strong economic growth and the stock market does not perform well and China has been a really bad performer in 2010, then I would be a little bit careful about making large commitments to China.

If you have $10000 to invest, what kind of allocations would you like to do for the next 12-24 months?

Basically, I do not take new money for management, but if I have say a million dollars to invest today, I would say right now encash US dollars. The correction in asset markets has begun and on this correction, may be 20% from the peak, I would probably buy some real estate, I would buy some equities that have high dividend yields and I would buy some precious metal.

By Justin John

http://dawnwires.com

Justin John writes for DawnWires.com and is a Director at a European Hedge Fund.

© 2010 Copyright Justin John - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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