It is normally not a good time to sell when everyone is rushing to the exits in a panic, although hedge funds that have adopted conservative risk management practices may have no option but to cut loss-making positions, and suffer the indignity of a whipsaw on a swift index bounce-back.
However, a number of local funds are poised to pounce on bargains.
“We do not believe this is as serious a crisis as 2008, and equity markets are cheap even allowing for a recession,” says Richard Harris, CEO of Quam Asset Management in Hong Kong.
“The debt troubles that were transferred from the corporate sector to the public sector have re-emerged with force and market movements have decoupled from economic fundamentals to just focus on daily news creating volatility. In Europe, the defence of Italy most likely means that the battle to prevent the default of Greece is already lost.”
Hong Kong-based Bob Howe, who runs the Opera Pan-Asia Fund, is running 57% net long exposure. He points out that August is seasonally the worst month for Asia ex-Japan markets.
However, on the downside, he perceives that China and India are in sour spots in the investment cycle with inflation picking up even as growth there slows. Furthermore, he is wary of debt issues within China as he sees local governments being unable to service debt payments.
“Margin pressures are severe on Chinese and Indian companies as costs go up but governments don’t allow price rises,” he says. “However, on the positive side, corporate balance sheets are strong, M&A is starting to heat up and there are share buy-backs. The VIX has spiked to over 44, a situation, which five out of six times since 1987 is a buy signal.”
With so many negatives in the watch list, he believes the market could now rank as a contrarian’s buy.
We look set for another week of Europe-induced fear, as German Chancellor Angela Merkel continues to defy market wishes to adopt the eurobond solution. Asia continues to be correlated to events elsewhere.
“Asia will continue to grow albeit at a slower pace, so one should be buying if one takes a longer term view, although this is a hard thing to do when global headwinds and investor sentiment remain so negative,” says Ophelia Tong, the investment director at HT Capital Management in Hong Kong.
“Markets will remain choppy and are more sentiment-driven than valuations so we try to position the best we can. The funds have taken a very defensive stance and followed the short-term strategy as outlined last week to sell on bounces. When the dust settles, the funds will employ cash more aggressively.”