The Hindu Business Line : `Emerging markets' risk appetite improved in the last 2 months'

Allianz Dresdner Asset Management CEO, Mr Mark Konyn, says that money is being redeployed to India and some money from Japan to India has started to pull back.

Talking of emerging markets, he says that rate hikes remain a concern, however, risk appetite has improved in the last two months.

Excerpts from CNBC-TV18's exclusive interview with Mark Konyn:

We have seen some money coming into emerging markets including India in August. Have you been deploying more money into emerging markets? Are you getting more money to invest over the last 30 days or so?

Yes, the risk appetite has improved since the downturn that we saw in emerging market performance during the second quarter. As a result, we have seen more interest in more robust markets across this region and investors generally have improved their overall outlook. But there are still a number of concerns out there. This week we saw shock; a surprise interest rate increase in China, which immediately had an impact right across this region in terms of affecting stock market performance.

For India in specific though what have you seen by way of investor interest? How much money do you still have invested in this market?

We are a large group and obviously we have got funds and accounts globally that are invested in India, so I don't have precise numbers. But generally, the investments have held reasonably well, perhaps Japan being an exception. We have general statistics showing that the investment thrust, that had been so keen on investment in India, has started to reverse and is probably still reversing.

Japanese markets and investors tend to be quite cyclical. Consistent with what we saw a few years back with China, when Japanese retail investors really embraced the Chinese investments and then poured back during the course of 2005, we see something quite similar now with India. A lot of enthusiasm, which was built up in Japan for Indian investment, is now starting to pullback a little bit.

But if you look more broadly at the BRICS funds for example, they are pretty much holding their assets. They are struggling a bit, to raise additional assets from their retail investors who perceive that they have seen the best of these types of funds in terms of performance and are still sitting on reasonably healthy gains now with most emerging markets building back up to their previous highs during the course of July and August. But they are probably holding back and waiting to see what transpires next in terms of global interest rate policy and the outlook generally for global growth.

We hear that many of the emerging market funds are sitting on fairly high levels of cash, which a lot of people see as a nice buffer or an opportunity when it finally comes in. Is that the anecdotal evidence that you hear as well, and are you sitting on slightly higher than usual levels of cash for emerging market portfolios?

I guess, it depends on individual funds and what their investments remit. Our approach is to be fully invested where we have exposure. We have interest in India where we might have pulled back during the downturn. We might be re-deploying some of our investments to India at the moment but these are more short-term tactical moves. Generally, we will be fully invested.

We have very low levels of cash, but I think your anecdotal evidence is probably correct. Some of the international funds that have exposure to emerging markets have probably pulled back some more and are trying to steady themselves ahead of any perceived outflow from these funds, which is always an issue with emerging markets. Emerging markets, within a retail investor's portfolio, tends to provide a sort of turbo thrust at the peripheral, and as a result they are subject to large swings both in and out.

So typically a fund manager who has experienced these outflows in the past, as they encounter a market correction or consolidation, will typically build up a buffer of cash hoping not to get caught out as these redemptions start coming through, and be forced to sell their most liquid stocks in the portfolio, which tends to be the higher quality stocks. So rather than look to unwind some of those stocks that are less liquid and perhaps have performed, they are forced to sell stocks that they would have liked to hold for a long term and which are likely to do better over the full cycle. So in that sort of environment you do expect to see some of the dedicated funds build up some cash positions.

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