The Hindu Business Line : Amaranth blow-out

A US hedge fund Amaranth Advisors has imploded after making a bad bet on natural gas, losing about $6 billion (out of assets worth $9 billion). Amaranth Advisors said its losses swelled by $1.4 billion this week because the firm had to unload assets at a discount to avoid a shutdown.

Point: This could be the tip of an iceberg, as commodity prices - both metals and crude — are declining after a sharp-run in recent times. Hedge funds being unregulated entities have taken higher exposure in commodities.

Counterpoint: This is mere scepticism. Hedge fund players being far more aggressive may have hedged their exposures in commodity with some other less risky asset class. The recent fall in commodity prices could only be a temporary phenomenon.

Impact of US slowdown

Point: The US economy that is witnessing stagflation (as the housing market is on a downturn even as inflation continues to rise) is showing signs of weakening further. This could pose a threat to global equity markets.

Counterpoint: As India is relatively insulated from American markets (even for software services, a US slowdown may accelerate the offshoring trend this time around, unlike the technology meltdown in 2001). It may not, therefore, have a significant impact on fund flows.

Thailand coup and pan-Asian effects

Point: This could affect FIIs fund flow in the pan-Asian region as some other countries in the region carry the same political risk.

Counterpoint: Barring any deterioration, the Thai fallout is likely to be short-lived.

A repeat of the 1997-98 Asia financial crisis is unlikely given the region's much stronger economic fundamentals.

And even if the crisis drags, the funds, which were originally planned for Thailand, can enter safer havens such as India.

Weak commodities

Point: Weak commodities may be a precursor to a downturn in equity markets. As global fund managers invest in diversified assets, weakening of one asset class in the portfolio could have an adverse impact on other assets too.

This was echoed to some extent in the May meltdown in the Indian markets, when first metals declined, crude oil soared and equities slumped.

Counter point: This need not necessarily be so. Even if commodity prices decline further, the fund flows originally slated for commodities will move into other asset classes, particularly equity, strengthening it further. The coming days will determine which view gains an upper hand.

Compiled by K. S. Badri Narayanan from market sources

More Stories on : Economy | Foreign Institutional Investors | Commodities | Politics

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page