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Kumar Shankar Roy

So far 2008 has turned out to be a lacklustre year for equities. The global meltdown has wiped off $3.3 trillion of global investor wealth this year, with Pakistan being the lone stock market to stand tall. Emerging markets have suffered from rising aversion to risk, even as the US — the country with the largest national GDP reels under the effects of a slowdown.

In Asia, last year’s best performing equity markets such as China and India have lost over 20 per cent of their value this year, placing them among the worst performers this year. Others such as Hong Kong, Korea, Malaysia and the Philippines also languish, after substantial gains made in 2007.

Foreign investors have withdrawn over $3.2 billion from Indian equities alone in the first 75 days of this year. Last week’s fund flow patterns do not provide any solace. FIIs and domestic mutual funds have remained net sellers to the tune of $100 million in the past five days.

Recent patterns in FII flows suggest that every hint of a recovery has been used as a means to pare holdings, as institutions remained unsure about the existence of further downside and hence have moved money into safer assets. For the Sensex, barring Friday’s 400-point jump — arguments in favour of ‘value’ buying at 15,700 levels have not found many takers. This, by the way, is a trend not limited to India only but is true of the entire Asian region. Investors appear to have moved cash out of equity funds into defensive options such as money market funds. Evidence of this is available from fund tracking company — EPFR Global, which shows that money market funds witnessed a net inflow of $12.15 billion in cash in the week up to March 12. EPFR calculated that as much as $2.8 billion went out from long-only emerging market equity funds this week. For consumers in the emerging markets, a weaker dollar makes US goods less expensive. But in the emerging equity markets, US investors have been compelled to limit exposure due to the sagging greenback.

A weaker dollar is traditionally known to push up prices of “real assets” like commodities; this trend has again been in evidence. Spot gold touched record highs of $1,000 per ounce recently and crude oil flirted with the $110 a barrel mark. Hedge funds that dabble in commodity trading and futures may have another decent run in March as they build upon their best start in 10 years. They managed an average 9 per cent return in February, data from HedgeFund.net shows. For conventional investors, however, the spate of bad news hasn’t ended. With the crisis in US mortgage market spiralling further, institutions having exposure to risky loans and asset backed by mortgages have had to search for fresh avenues for capital. S&P’s report this week put the write downs of collateralised debt obligations of sub-prime asset-backed securities in North America and Europe at approximately $110 billion.

Another $40 billion in writedowns by insurers takes the disclosed writedowns to the $150 billion-mark, estimates Standard & Poor’s ratings. So when is this all going to end? S& P believes that the bulk of the writedowns of sub-prime securities may be behind, for the banks and financial companies who have already announced their results for full-year 2007.

In the coming week, participants of the Asian markets are now expected to continue tracking US developments from the sidelines. Expect a volatile week ahead of the Federal Reserve meeting on Tuesday as investors grapple with the possibility of yet another hard-line rate cut. Expectations have been built for a yet another big cut. Data from Fed fund futures show that the market is factoring in a 76 per cent chance of a 75 basis point cut in the federal funds rate, bringing it to 2.25 per cent. Whether the cut will save the US economy is under doubt; but if expectations are not met, emerging markets in Asia might witness yet another bout of outflows.

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