Christope Lalo, MD, Societe Generale Asset Management said that the market expects the Fed to cut rates further. He added that the recent correction in August was viewed by a lot of hedge funds as a good opportunity. According to Lalo, today emerging markets pose great opportunities. Appreciating currency is not very good for the long term he added.
"Expect the Fed to cut rates further, maybe not in October by Q1CY08," Lalo said. He added that the decoupling of EMs for the US is underway but the ride may be bumpy on account of new flows from hedge funds.
Commenting on the Sensex, he said that one could see it at 20,000 by the end of 2007 or early 2008. He added that we may see risk appetite for EMs re-emerging.
Excerpts from CNBC-TV18's exclusive interview with Christope Lalo:
Q: What did you make of the Fed rate cut and how do you expect money flows to change within Asia because of that cut?
A: We have seen that the Fed cut was unexpected by the strength that they showed. Overall it was a good response to concerns of liquidity, credit crunch and the sub prime. Going forward the market expects the Fed to cut further, not necessarily at the next October meeting, but by the end of the year, maybe by Q1. Everything will have to be looked at from three important points; the corporate earnings, the housing markets and the consumer confidence. And from that we will see whether or not we will have more cuts in interest rates in the US or it will slow as the economy seems to be picking up a little bit more.
Q: How do you see the hedge fund fraternity positioned in emerging markets now? Is there more skepticism and therefore people have been sitting on cash and not in stocks, would that change now with what the Fed has done?
A: There have been two types of hedge fund managers. In the last two months, those who unfortunately are not there any more to talk about what they have done because they are out of business and those who have survived either because they have strong risk management or because they sat still. I think most of the managers we have talked to have been waiting for the opportunity and as we discussed last month on the show, the clean up in July-August has been very interesting for the long-term well established hedge fund managers to pick up very good assets at the counter prices.
So those have been very exciting opportunities for us and for other managers. Going forward, I think that it should be no different. Our views regarding emerging markets are that emerging ten-years ago was dangerous but today emerging markets offer great opportunities. With the decoupling between the US, Europe and Japan on one side and the Asian economy on the other side, it is fairly obvious, in the US you have rate cuts and in Asia, China has raised interest rates for the fifth time this year. So there is very slow growth on one hand, nervousness and people in the US are very worried whether they will keep their homes or not and we are anxiously looking at corporate earnings from the financial stocks. And on the other hand you have Asian economies growing between 8-10% per annum.
The currency is appreciating, which is not so good for the long-term, but definitely you have China and India and the rest of Asia picking up as the growth engines of the world. I think it should be going on for the next few weeks, few months and soon the next few years. So we should not be too worried about the emerging markets but more like very optimistic and very excited about the opportunities going forward.
Q: In the nearer term what do you expect to see in Asia? A greater surge of money coming into the market or do you think it will be a bit quiet?
A: Of course, it will be a bumpy ride because we will have announcements of companies going bankrupt or being bailed out by a certain Central Bank or because the level of exposure of banks is greater than anticipated.
So it's going to be a bumpy ride, but again what has changed dramatically from the last few months is that we have banks who are very generous in lending money to corporates or to buy a house or to buy stocks . There will be a tightening of this lending money.
So even though some said that the Fed shouldn't have been cutting so much, because it gave a message to the people that you can do whatever you want, we will be here to bail them out. On the other hand they are much more, at least the banks will be much more cautious when lending money to either corporates or retail investors to leverage. The main thing about this crisis with leverage is that the way some banks are reacting right now is a tightening grid on lending and it should be the bullish markets going into the end of '07, beginning of '08 at a much lower pace.
But again the fundamentals are very strong in Asia. There was not so much exposure to lending in Asia, but we have made new highs yesterday. Most Asian markets are going to go back up, we are up 20% from the last time we spoke and we keep having this target of the Sensex to 20,000 by year end or Q1 of 2008. So we are still optimistic about the months ahead.
Q: So you see risk appetite going up for emerging markets again from here?
A: Definitely, even though there seems to be a disappearance of liquidity, it is not that the liquidity is not there anymore, but the people nowadays are very cautious of where to put their money. So there is still ample amount of liquidity available. It was invested here and there before the crisis. Now and during the crisis people got back the money and that will now reopen the gate of money flow.
Therefore, people who anticipate it to be a good opportunity in the medium-long-term, people will go for it. So there will be scarce liquidity for those who are not so excited and there will exciting investments for interesting countries in Asia. In India there will be no problem.
It will not be the same pace of inflow, but definitely the money is still there and usually it takes another month or so for the market to really go back at full speed. We do not expect the market to go full speed before the crisis but it's still a very bullish market on opportunistic investments so nothing to worry from our side
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Source: MC
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