The Hindu Business Line : ‘Emerging markets stocks will rise first’

Mumbai, Nov. 19 Equities in the emerging markets will be the first to rise when sentiment in the market turns around, said a global portfolio strategist.

Emerging markets were hammered due to the collapse of the hedge funds, he said.

“The hedge funds and other overseas investors liquidated their emerging market portfolios to meet redemption pressure in dollar denominated currencies,” said Mr Donald G.M. Coxe, Global Portfolio Strategist, BMO Finacial Group, a Canada-based financial services company. “When these funds’ cash build up starts getting invested in financial assets once again, the first to grow will be the equities in the emerging markets.”

BMO Capital Markets, a company owned by BMO Financial Group which has pension funds and endowment funds as their clients, plans to start investment banking operations in India shortly.

Mr Coxe has raised asset allocations in emerging markets for pension funds by two per cent and reduced allocations in Japanese and Korean equities by two per cent.

To start buying stocks, the important indicators that investors should watchout for, according to Mr Coxe, are the Volatility Index, the TED Spread (explained below) dropping to 100 level, and the weakening of the yen and the dollar.

As long as the volatility index is trading in a plus-30 range, the stock market is still not stable and VIX Index needs to retreat to the 25 level when it will be time to start buying, said Mr Coxe.

The TED Spread is the yield differential between the front-month 90-day Treasury Bill and Eurodollar contracts. This peaked to around 500 when Lehman collapsed and broke the 200 mark last Friday and is currently at 197. It needs to break 150 and stay there for at least a week , then the financial crisis will no longer command the centre stage. “When TED Spread drops to around 100 levels, it will be the time to start buying stocks,” said Mr Coxe.

“The Japanese yen and the US dollar, which outperformed other currencies and have risen sharply, should revert to normalcy and turn negative,” he said. “As US investors sell assets outside the US and repay debts inside US, the dollar rises.

“When all four indicators have come to the desired level, it will be time to start buying.”

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