Tapering talk by the US Federal Reserve topped market events this year, say hedge fund firms, which navigated through a year of volatile markets. Managers from a cross-section of strategies predict that more tapering-related market shocks and emerging market volatility is in store next year.

Tobias Hekster, True Partner Fund
Global volatility arbitrage 

If I were to summarise, the key market event of 2013 was the phenomena, or discussions, around tapering in the US. As soon as there was a threat of [US Fed Chairman Ben] Bernanke taking the punchbowl away from the party, so to speak, the markets started tanking.

Even though it is a US-based event, the repercussions were most widely felt in the emerging markets and Asia.

Overall this year, the China market lagged. But in 2014 it could have some upside surprises on par with what we’ve seen in Europe and the US this year. European markets went up quite a bit and the S&P500 went up phenomenally. 

At the same time, the European and US markets have not had significant movements on a daily basis. It’s been more of a steady trend of crunching upwards, with volatility only hitting when tapering discussions come up.

I believe a reinstatement of the tapering discussions next year will impact emerging markets again. I would expect that towards mid-year there will start to be some tapering. It’s the reason why for us, as a volatility fund, the majority of opportunities are expected to continue to originate from Asia.

Chris Choy, Quam China Focus Fund
Greater China-focused long/short equity

We initially expected the macro environment to be better this year and didn’t expect the market to trade at the low levels that it did. There was volatility, especially in the emerging markets and in the US due to the QE (quantitative easing) tapering announcements, as well as concerns about slowing growth in China.

Next year, the markets could be even more volatile than in 2013. The US will need to come to a decision on how to exit its QE program by the end of this year. The problem is that the US economy is not on a clear path to recovery, but the Fed knows that if it keeps interest rates sealed for an extended period, the market will lose momentum.

For China, we take the view it is still struggling with several internal problems, including a property bubble, bank debts and the transformation of its economic structure from a manufacturing-based economy to one that is consumption-based. The government is taking steps to remedy matters and by next year should be making progress on its promised reforms.

Hisashi Osezawa, Simplex J Flag Fund
Japan-focused long/short equity

In the first half of 2013, the [Japanese] market was reinvigorated after a long period of sluggish stock prices, resulting in stock price increases across the board. Market participants have been seeking out growth-related stocks, pushing up the overall market as a result.

I expect continued [domestic] market growth in 2014. Although I anticipate that a high level of market volatility will continue for a while, I believe it will not be a significant factor that will impact investment opportunities.  

In January, the government is scheduled to launch the Nippon Individual Savings Account, or Nisa, scheme which will let individuals open tax-free accounts for investments. This will have a positive impact on the equity market.

However, the sales tax is in line for an increase from 5% to 8% starting from April next year, which could adversely affect corporate profits.

Eddie Tam, Central Asset Investments
Multi-strategy

If the Fed does taper [next year], it will cause enormous pain to some emerging countries which are running significant account deficits, namely India and possibly even Indonesia. But North Asia, including China, should be fine because they are running current account surpluses and don’t have significant budget deficits. 

The main trend is that although emerging economies have lower rates of growth, they are still growing at a faster pace than developed countries.  

We may very well be in an era of relatively stagnant growth for developed countries, lasting for an extended period of time. Because of that, QE may be the norm within a decade, while stopping or slowing down QE will be an exceptional event.

Emerging markets have been lagging developed economies for the past five years. Next year there’s a chance, in my opinion, that it may turn around. While the Western markets won’t experience a crash, they might not perform as well as they have this year, whereas Chinese markets may outperform.

 *A full version of this article is feature in the December edition of AsianInvestor magazine