Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
The fund initially raised a massive $509 million during its three-week initial public offering period in March, one of the largest public launches of a non-capital guaranteed fund in Hong Kong. It is currently adding $25 million a day from investors in Singapore and throughout Europe.
Christian Deseglise, managing director and product manager for global emerging markets at HSBC Halbis Partners, admits that the appetite for the fund has surprised him, but says he has been reassured by the approach of new investors.
"The performance of global emerging markets has been good for two-to-three years now, but it's reassuring that investors are recognising the improving fundamentals in these markets and are coming in for longer-term investments," he says. "Despite a flood of funds into these markets, we still think the valuations are still pretty attractive and offer good long-term investment prospects."
Deseglise, however, admits that a number of "small dark clouds" are beginning to appear on the horizon: "There are concerns of an economic slowdown in the US on the back of a slowdown in the housing market. There are also signs beginning to emerge of an increase in core prices which is leading to concerns about inflation û which would obviously hit the emerging markets."
Overall, however, the New York-based Deglise says he remains confident in the prospect of the world economy, particularly with the IMF having recently increased its world growth expectations for 2006 to 4.8%.
"Globally things are looking good," he says. "We're seeing better than expected growth in Japan and Europe, so while there may be some short-term volatility in the emerging markets and that could lead to profit-taking, the fundamentals in the medium-to-longer term remain good."
While HSBC Investments is unable to disclose the exact performance of its GEM fund since launch since it is less than six months old, Deseglise admitted growth had already been in "the low double-digits".
Of the emerging markets, Deseglise says he prefers Russia and Brazil, which represent 10.8% and 10.7% of the portfolio respectively.
He is also positive about China, he says, but adds that the fund recently took profits on concerns about over-valuation.
India, he says, is currently trading in "excessive valuations", and the fund has reduced its exposure to just 1.5%.
In terms of sectors, Deseglise says he favours financials, commodity, and commodity-related stocks, pointing out that the fundÆs single largest holding, Russian oil giant Gazprom, currently makes up more than 4% of the total portfolio.
"On an asset basis, there is still an enormous discount û between 80-85% - between Gazprom and Western rivals such as Exxon Mobil," he says, pointing out that the Russian's oil reserves are being valued at about $2-3 a barrel compared to $18-19 for its American counterpart.
Since the GEM fund is a freestyle fund, it has no benchmark, and operates in a similar way to a hedge fund, but has limitations on the size of stakes it can take in certain assets and countries. It currently holds stakes in 82 different companies across the world's emerging markets.
About 5% of assets are currently held in cash, but Deseglise points out that this is "about as much as is coming into the fund every day".
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