Global inflation may moderate in H2CY08: Konyn

Q: Some checks are throwing up that for county specific funds, the redemption pressures have eased off a bit even though cash levels are still quite high. Is that something you are seeing for India specific funds or Emerging Market (EM) Funds now? 

A: In EM Funds generally cash levels are a bit higher than one would have expected. Partly it’s in anticipation of been able to manage those redemptions as they come through and partly overall it’s a general derisking of portfolios as far as those mutual funds can exercise that judgement based upon the general guidelines that the funds have. So it’s still the case that suddenly globally there is a degree of caution. Out of this, region retail investors have sort of held their nerve a bit more perhaps similar to what one is seeing in India and perhaps the volatility levels that we are seeing which have increased this year certainly have not been sufficient to dissuade investors about the long-term story. The growth story may moderate but it is still intact. We are still expecting high levels of growth out of China this year, 9% levels of growth. We expect growth to moderate in India which we have spoken about a bit based upon the actions that the Reserve Bank have taken, the government have taken in term of tightening both fiscal and monetary policy but overall the longer-term story is still very much intact. So from an international stand point the political situation in India is another level of uncertainty, which could hold back a short-term rally.             

Q: What’s your view of what’s going on in the west because, the Dow has crumbled in the last few weeks of trading, what’s the market pricing in there because that’s sending out fairly negative signals? The US markets after being so resilient in the first few months of the year.

A: The US economy has performed better than most were expecting, partly as a result of the weak dollar where we have seen the export sector particularly strong, which has allowed the economy to fire up another engine when consumption has been pretty weak. As we know the housing slump has been severe and the impact of the credit crisis particularly on the financial sector has been extreme, but never the less the economy so far as avoided that recession and if you look through the comments of the Fed, the most recent ones. It still has a recession bias in the way in which its conveying its analysis, which means that it is not as the market, seems to be pre-occupied with inflation. 

We saw such situation in April, where markets were in a strong rally phase. We saw a lot of money come in to the markets generally and emerging markets. That worried Central Banks - both the Fed in the US and the ECB in Europe where we started to see the expansion of bank balance sheets again. This looks back to what we have seen in the previous year, which was part of the problem that built up the sell-off that we have seen this year. So because of that, some of the wording of the posturing from the Central Banks got a little bit hawkish. But the overall stance as we have seen from the comments; more recently from the Fed is for this recession bias. So we do expect not to see this sort of a rapid increase in interest the rates perhaps markets discounting. 

Two weeks ago in the US, the high oil prices were having a psychological impact on the way the investors are behaving because it affects them deeply. Seeing pump prices top USD 4 per gallon and as a result they are pre-occupied with inflation where as perhaps the underlying economic situation is not going to unravel in that way. So we have seen a reaction in the market to that and on top of that we got political tensions again now in the Middle East which is weighing heavy again on investor psychology and it is going to take some time before those work their way through, so we are probably not going to see significant change through the summer.  

Q: For equity markets worldwide for the rest of this year what would you attach a greater probability to - are they range bound, show you some kind of pullback or that indeed conversely there is going to be another sharp pullback for most markets? 

A: We have seen in the last month that more recently we are seeing markets flow to gain with their lows that could occur again. So market could well bounce along the bottom for a little longer. We are not going to see any great shakes or any great movement directionally through the summer months.  

As we get towards the end of the year and there is more evidence which can confirm the economies are slowing, inflation is not the big threat that it promises to be suddenly at the moment. And we start to see the growth come through as expected in many of the emerging markets particularly in this part of world.  

Investors will start to differentiate between markets and earnings are holding up reasonably well across this region. We could well see some more allocation coming in internationally and certainly domestically where individuals, corporate are not particularly leveraged and there is an opportunity for fresh allocation.