The Hindu Business Line : `Asian market fundamentals look good'

We expect more stable returns in the market as we progress because now the valuations look very attractive and all the fundamental factors have been in place.

Rajeev Baddepudi, senior analyst at Eurekahedge, says that fundamentals for Asia look good and he expects stable returns to make a comeback. He adds that emerging markets look stable and valuations look attractive.

They seem to offer good opportunity, he says adding that equity-focused funds have been doing well in India.

Excerpts from CNBC - TV18's exclusive interview with Rajeev Baddepudi.

How are you viewing the markets?

There were wild investor fears over inflation. We have seen volatility take control over the markets. In July, there were several other fundamental scenarios such as the North Korean missile testing, the Lebanon crisis and supply restrictions in the Venezuelan production market in crude oil. What this has led to is basically a high level of volatility. Hedge funds, the usual suspects, the ones in it that were better performing in the two months were market tutorial strategies and pair trading strategies, that is arbitrage funds, relative value funds etc. The other ones like the long short equity, the equity focused ones or the commodity focused ones, commodity-trading advisors were badly hit.

But one positive thing though, if one looks at the index performance over the past three months, it has been getting better progressively. If one looks at Asia ex-Japan index, May's returns have been minus 1.7 per cent, in June it came down to minus 1 per cent and in July it was just 10 basis points negative return. So although all have been negative, what we see is a betterment of the returns over a three-month period.

Year to date you have done around 4 per cent on Asia while overall emerging markets you have done considerably better. How is it looking now? It was more about when the correction would take place rather than if the correction would take place. So in that sense there was a surprise in May and it was in excess a bit, judging by the fact that in May there were a lot of the fund managers who were on vacation. We saw a lot of profit taking because of that as well. But we still maintain the stand we took in May.

We expect more stable returns in the market as we progress because now the valuations look very attractive and all the fundamental factors have been in place. The market has been getting more shocks. In July, there was the Lebanese crisis, the North Korean missile testing and unprecedented heat waves in the US and UK, and of course the big global market driver that consumers are worried about there being a slowdown in consumption and about inflation. These factors are weighing on the markets. But otherwise there are opportunities in emerging markets in Asia.

Just to put India-specific focus to this, what is it that you have seen by way of hedge fund activity in the past few months and even if you could set out a broad quantum of the size of these funds that might be focusing on India now?

We track about 25 India-focused hedge funds. They have combined assets under management of about $1.5 billion. What we have seen is that most of the funds are either equity-focused or multi-strategy funds.

The equity-focused ones have been doing well, not as much for the multi-strategy funds. This suggests of course that this was the latent interest in India over the past 3-4 years at most.

Equities have largely seen rising markets, so these funds are bound to do well.

What have you seen by way of emerging markets funds as well, the point being have you seen any new hedge funds actually being launched in the past one month or so or on the flip side have you actually seen redemptions or even shut downs because of the underperformance in emerging markets?

June has seen a lot of redemption pressures. We cannot put a number on the July redemption amount because all the funds' performance data has not yet come in. But in June there has been about $1.1 billion in redemptions overall of the 25 funds that we track. For the quarter itself there have been net inflows of about 200 million. So the month of June alone took the bulk of all the inflows seen in April and May by a long margin. So June mainly has seen a lot of redemption pressures in hedge funds but we expect investors to return over the next couple of months.

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