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Thursday, October 24, 2013

Pullback of funds from emerging markets likely to begin in earnest next year

Source: http://www.thestar.com.my/Business/Business-News/2013/10/24/Headwinds-seen-ahead-Pullback-from-emerging-markets-likely-to-begin-in-earnest-next-year.aspx

KUALA LUMPUR: A fund manager based in the United States said he sees “headwinds” for emerging markets as the Federal Reserve unwinds its five-year-old monetary stimulus, amid a slow but sure recovery in the world’s largest economy.

Grant Bowers, portfolio manager of Franklin Templeton Investments’ US Opportunities Fund, told newsmen in a briefing that what had been dubbed the “great rotation” of funds out of emerging markets was “still playing out”, triggered by the planned tapering of the Federal Reserve’s US$85bil a month bond-buying programme and easy money policies.

According to Bowers, the pullback is likely to begin in earnest next year, while interest rates may rise from near zero currently by 2015.

“As the US makes the transition to growth, the Fed sees the inflection point to end QE (quantitative easing) getting closer,” he said.

These factors should tip the scales in favour of US equities, which he said has quietly returned to the radar of investors.

And with the expected moderation in growth for emerging markets, the United States is looking like a safer bet, Bowers added.

“There is more interest in developed markets now than in the past five years. Risk appetite among investors will continue to increase,” he said.

Global fund manager Franklin Templeton, with over US$815bil in assets under management, now has half of its investments in stocks and the rest in fixed income, even though it is traditionally known as a bond house, Bowers noted.

“The US is an earnings growth story. The equity market is up 100% since the global financial crisis, which should not come as a surprise.

“Even if the pace of recovery has not been as fast as hoped, all the indicators – gross domestic product, jobs and housing – are pointing to growth,” he said.

Inflows into US stocks have outpaced bond inflows for the first time since at least 2009, charts compiled by Franklin Templeton show, indicating a “great rotation” back to risk assets after stock portfolios plunged following the 2008 banking meltdown.

The US stock market, the most liquid in the world, makes up 45% of global market capitalisation.

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