Investors eye confidence-building measures in the US
Asian frontier markets are relatively immune to the latest developments on Wall Street, says EPFR GlobalÆs Brad Durham.
Brad Durham is a managing director at EPFR Global, a US-based firm that tracks the fund flows and asset allocations of more than 15,000 equity, fixed-income, and hedge funds domiciled globally with $11 trillion in total assets. He shares his views with AsianInvestor about the latest struggles on Wall Street that are having a domino effect on markets worldwide.
Lehman BrothersÆ filing for bankruptcy obviously hurt the market. The rescue of AIG and a US bailout plan in the works to rescue banks and revive financial markets has allayed some of the fears. But worries over æwho's nextÆ and æhow much more damage can financial markets faceÆ are still there. What is your outlook following the latest developments in the US?
Durham: On Wednesday afternoon, I was extremely pessimistic. But as I sit here over the weekend, I am rather optimistic. I am astonished that what has so dramatically changed my mood is nothing other than some good old-fashioned government intervention. I am rarely in favour of government bail-outs or interference with financial markets, especially when it means bailing out those whose recklessness, greed and poor decision-making led to this credit crisis, but in this instance, it is clear that there really was no other option.
After the recent rapid succession of events, the takeover of Freddie Mac and Fannie Mae, the shock of the Lehman bankruptcy, the acquisition of Merrill Lynch by Bank of America, the bridge loan to AIG that effectively put it under government control, the Reserve Primary fund æbreaking the buckÆ with its NAV closing at less than $1 ûthe first for a money market fund since 1994 û and then the plummeting share prices of Morgan Stanley and Goldman Sachs, confidence was in shambles. And so the government did what it had to do to stem the panic that could have spread exponentially. This could have been a T-10 category typhoon and something clearly had to be done. And it appears that the measures proposed û and details will need to be worked out û were enough to restore the animal spirits to the market.
How will the latest developments in the US affect Asian equities and bond markets in the medium- to long-term?
I would expect more confidence to return to Asian equities and bonds in the coming weeks in sync with confidence returning to global markets. As we've seen in these cataclysmic events, global markets can be maddeningly correlated. It will take some time, though, for investors to begin distinguishing again between strengths and weaknesses. But I think commodity price declines in recent weeks are helpful to Asian markets, as are the strength of the balance sheets of Asian companies and many Asian economies for that matter.
Are there any particular markets in Asia that will be hardest hit by the latest developments?
The hardest hit were likely those with the greatest exposure to financials.
Which Asian markets will escape relatively unscathed?
I think the only markets to be relatively unaffected by this event are those that are illiquid and uncorrelated with US financial markets, such as Asian frontier markets.
What's the best thing an investor in Asia can do at the moment?
Pay close attention to the details of confidence restoration measures in the US. And then watch for how the US government pays for all of these measures. Will they borrow via treasuries or run the printing presses stimulating inflation and US dollar weakness? And will the US government show more fiscal restraint to prevent further expanding fiscal and budget deficits, and will all of this risk a credit downgrade?
Liquidity will likely be a bigger issue going forward. Do you expect a more serious liquidity crunch?
Hasn't this 13 month liquidity crunch been quite enough? I hope we've seen as bad as it gets. If the Fed in the US had not come riding to the rescue, we may have experienced the ultimate in liquidity crunches, a full-blown bank run, a financial markets meltdown and, dare I say, a leapfrog of recession right into depression.
What's the lesson to be learned from Lehman's filing of bankruptcy?
That as a financial institution you shouldn't be leveraged at 45:1 and exposed so widely to the fortunes of any single asset class, such as real estate, mortgage-backed securities and structured products. And as CEO of a financial firm, do more than just pay lip service to risk controls, actually put them into practice.
Lehman BrothersÆ filing for bankruptcy obviously hurt the market. The rescue of AIG and a US bailout plan in the works to rescue banks and revive financial markets has allayed some of the fears. But worries over æwho's nextÆ and æhow much more damage can financial markets faceÆ are still there. What is your outlook following the latest developments in the US?
Durham: On Wednesday afternoon, I was extremely pessimistic. But as I sit here over the weekend, I am rather optimistic. I am astonished that what has so dramatically changed my mood is nothing other than some good old-fashioned government intervention. I am rarely in favour of government bail-outs or interference with financial markets, especially when it means bailing out those whose recklessness, greed and poor decision-making led to this credit crisis, but in this instance, it is clear that there really was no other option.
After the recent rapid succession of events, the takeover of Freddie Mac and Fannie Mae, the shock of the Lehman bankruptcy, the acquisition of Merrill Lynch by Bank of America, the bridge loan to AIG that effectively put it under government control, the Reserve Primary fund æbreaking the buckÆ with its NAV closing at less than $1 ûthe first for a money market fund since 1994 û and then the plummeting share prices of Morgan Stanley and Goldman Sachs, confidence was in shambles. And so the government did what it had to do to stem the panic that could have spread exponentially. This could have been a T-10 category typhoon and something clearly had to be done. And it appears that the measures proposed û and details will need to be worked out û were enough to restore the animal spirits to the market.
How will the latest developments in the US affect Asian equities and bond markets in the medium- to long-term?
I would expect more confidence to return to Asian equities and bonds in the coming weeks in sync with confidence returning to global markets. As we've seen in these cataclysmic events, global markets can be maddeningly correlated. It will take some time, though, for investors to begin distinguishing again between strengths and weaknesses. But I think commodity price declines in recent weeks are helpful to Asian markets, as are the strength of the balance sheets of Asian companies and many Asian economies for that matter.
Are there any particular markets in Asia that will be hardest hit by the latest developments?
The hardest hit were likely those with the greatest exposure to financials.
Which Asian markets will escape relatively unscathed?
I think the only markets to be relatively unaffected by this event are those that are illiquid and uncorrelated with US financial markets, such as Asian frontier markets.
What's the best thing an investor in Asia can do at the moment?
Pay close attention to the details of confidence restoration measures in the US. And then watch for how the US government pays for all of these measures. Will they borrow via treasuries or run the printing presses stimulating inflation and US dollar weakness? And will the US government show more fiscal restraint to prevent further expanding fiscal and budget deficits, and will all of this risk a credit downgrade?
Liquidity will likely be a bigger issue going forward. Do you expect a more serious liquidity crunch?
Hasn't this 13 month liquidity crunch been quite enough? I hope we've seen as bad as it gets. If the Fed in the US had not come riding to the rescue, we may have experienced the ultimate in liquidity crunches, a full-blown bank run, a financial markets meltdown and, dare I say, a leapfrog of recession right into depression.
What's the lesson to be learned from Lehman's filing of bankruptcy?
That as a financial institution you shouldn't be leveraged at 45:1 and exposed so widely to the fortunes of any single asset class, such as real estate, mortgage-backed securities and structured products. And as CEO of a financial firm, do more than just pay lip service to risk controls, actually put them into practice.
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