Thursday, January 30, 2014

Double whammy of withdrawal of funds from emerging markets

In the past few trading sessions, there has been a considerable withdrawal of funds from the emerging markets. We can attribute this to two basic reasons.

Firstly, we have seen reduction of QE from $85 billion to $65 billion in the last four months. Secondly, we have seen an upward pressure on interest rates in the developed world. These two factors have combined to create A double whammy. At the time when funds are scarce, we have a reverse potential difference that is pulling money towards developed markets. This perverse situation will lead to substantial abatement of money flows from emerging markets to the developed markets.

In addition, there is already in place, an incentive to emerging markets sovereigns to invest in developed market treasuries for mercantilistic reasons.

I believe, these three forces will lead to substantial correction in equity markets in developing countries. Hence, we will see drastic correction in Indian equity markets. I also think, the same logic will hold for other developing countries.

I will be trying to close my open positions as soon as I can. Let us hope that we are able to ride out this turbulent phase. However, I do not think that this turbulence will last more than three months. Therefore, it is essential to get into the market say around end-April.