 "Cameron Brandt")
What is your assessment of the fund flows in the first half of calendar year 2016 (CY16)? What is the road ahead?
The first half of the year was, from a fund flow perspective, a period where mutual fund investors generally took the ‘risk-off’ option. They showed some early enthusiasm for Latin America because of the general move against Leftist, statist governments and policymakers, and they tested the waters several times when it came to emerging markets equity and bond funds.
Yield hunger clearly remains a factor and, as long as the US Federal Reserve (US Fed) stays on hold, while Bank of Japan (BoJ) and the European Central Bank (ECB) persist with negative interest rate policies, the second half of the year is likely to be kind to higher risk, higher return fund groups.
Are the markets already factoring in the worst-case scenario on Brexit?
The Brexit process is a long one and markets operate on much shorter time scales. Given that the UK’s referendum was non-binding and the people who engineered the vote are now largely sidelined, the range of possible outcomes could lead to another referendum, and markets have plenty to worry about in the meantime.
It’s worth noting that for some time, our fund flow data indicated that mutual fund investors see European Union as the weaker of the two parties on either side of the ‘Brexit’ vote. Year-to-date flows (expressed in percentage of assets under management) show that, even with the pre-vote outflows, UK Equity Funds are in the middle of the pack while funds dedicated to core continental markets such as Germany, Italy and Spain have experienced much bigger relative redemptions.
How are foreign investors viewing India as an investment destination now?
The failure to extended Reserve Bank of India (RBI) Governor Raghuram Rajan's term has certainly dented enthusiasm, and investors seem to be taking a wait-and-see approach to the monsoon predictions. But going into June, fund manager allocations for India were generally on the rise and with reform expectations reset at a much lower level, it won't be too hard for India and its policymakers to exceed the current consensus.
Will emerging markets (EMs) benefit from the diverse monetary policies across the globe that promise to push in more liquidity? How will developed markets fare in comparison?
The ultra-accommodative monetary policies being pursued by the BoJ and ECB should give emerging markets a bit more breathing room. But the returns on cheap credit are already diminishing - something China is illustrating on a grand scale -- and, without structural reforms, EMs will simply be storing up more trouble for themselves. The story for developed markets is much the same. If they don't use the window their central banks are giving them to restructure and reform the short-term gains from this liquidity will be less that the long-term costs.
Will the US Federal Reserve (US Fed) now remain on a prolonged hold as regards rates given the uncertainty surrounding Brexit and its implications for global growth?
Recent flows are certainly signaling that mutual fund investors believe the US Fed is unlikely to raise rates before the third quarter of 2016 and probably won't even then, with Emerging Market Bond Funds seeing record setting inflows the first week of July and flows into High Yield Bond Funds rebounding sharply. I think this is increasingly likely, although I think it may be the depreciation of the British pound and the Chinese yuan and the impact that has on export earnings and the US trade balance, that really sways the US Fed in that direction.
Do global markets have anything to worry about in case Donald Trump becomes the next US President?
Yes, although in my opinion less from what he'll do than what he won't get to. I am old enough to remember the same angst and prophecies of doom that accompanied Ronald Reagan's march to the US presidency. Trump is a dealmaker and a pragmatist, so I expect he'll compromise to get things done and hence may get more done in some areas than President Obama. But I think he has a limited capacity to learn about things that don't interest him and could easily put the US in the situation of (over) reacting to threats and problems that could/should have been nipped in the bud.
