Posts Tagged ‘Emerging markets’

Gold Rush

Posted: January 31, 2014 in Uncategorized
Tags: ,

January….Gold has been one of the best asset….just when all Global Research Houses downgraded their forecast on Gold.

As usual it is the famous saying “do what Wall Street does, not what Wall Street says” – Specially when Goldman Sachs say something you should do the reverse….up to you guessing why.

Jokes apart – the rise of Gold is one of the various unintended consequences of the tapering. And we had just 2 tapering episodes. So if the FED keeps on tapering (as they will do)  and create shockwaves in the emerging market – emerging market will keep on increasing their flight to safety …US treasury bonds, USD and gold. Gold will be mostly physical…so there will be a delay in the price movement.

The big resistance for gold is USD 1270 , then USD1,340 and USD1,420. As usual it is a good hedge versus equity – and very dangerous play.

The double bottom plus bear trap at USD1,180 looks pretty solid – but Gold is pretty wild at the moment.

The decision of the US Federal Reserve to decrease by another USD10 billion their QE again is sending the world share market tumbling. 

Why? The Quantitative Easing drove the bond yield in the US to extreme lows. As institutional investors look for yield they had to go overseas (Emerging Market) to find satisfactory yield. This provoked a massive inflows of capital in the Emerging Capital with also negative side effects (Eg inflation in Brasil).

Now the reverse is happening and there is a massive reversal of capital flows (to make you understand USD10 billion in the average monthly portfolio investment in Turkey, India, Brazil, Indonesia, Thailand Ukraine and Chile combined!!).

When you make such a massive hole – two things happens:

– The markets change to adjust to the new reality

-The issues of the fragile economies in the Emerging Market come in evidence. And it will keep on coming up anywhere you find  a fragile economy

Why the US FED is doing this?

– The FED mandate is “taking care of the US, not the world”. Unless there is a contagion effect, the FED will not react of these issues.

– The FED cannot keep on buying forever (its balance sheet is heading towards USD3 trillion

-The FED is actually happy to take off some of the steam from the market as it as been accused to create asset bubbles.  A 10% fall in the market is actually welcomed. Maybe not now…but pretty sure between now and July

So definitely this year will be more volatile. And nobody is yet talking of the Debt Ceiling (7 February)

 

Louis Vincent Gave, manager of Gavekal Asian Opportunity is one of the most interesting manager to listen to. And he is worried.

There is a clear dichotomy between the Emerging Markets and there are only three potential reason/outcomes

 

1 The first is to say that the tailwinds to the Western economies (shale gas, robotics, ultra-easy monetary policies, fiscal and
regulatory policy visibility…) are just so strong that the valuation gap between emerging markets and developed markets
can only accelerate from here. In this scenario, one would want to continue buying developed market equities at the
expense of almost anything else.
2  The second is to say that, if developed economies really start growing as fast as Western equity markets are increasingly
starting to discount, then one should not worry too much about a China slowdown. Instead, one should use the recent sell-off
in EM growth stocks as a terrific opportunity to increase exposure to Asian and emerging market equities on the cheap.
3 The third, and more worrying conclusion would be that, while emerging markets are rightly discounting a growth slowdown,
developed markets are not, probably because of the excess liquidity created by central banks. However, if/when the spigots
get tightened and/or growth in developed markets is unable to build on the recent momentum, then the valuation gap
might close not through a re-rating of emerging market equities, but a de-rating of developed markets.
It is this third possibility that has GK worried today. Indeed, with a US economy approaching “stall speed” (whenever US GDP and US
industrial production growth fall below 1.5% YoY, the US economy has always experienced a recession), with growing uncertainty
regarding US monetary policy, with the threat of partisan budgetary battles looming once again in Washington, with Southern Europe remaining stuck in a deflationary bust… a number of factors pushed GK to reduce the overall risk across most of the actively managed GaveKal funds in July. This was obviously not the best immediate decision and helped contribute to the past month’s under performance.

So there are two outcomes …or he is wrong or he simply acted to early. This kind of dichotomy is statistically 70% associated with a crisis.

As of me, my personal scary month is mainly September and part of October – I am very traditional guy indeed 🙂