Investors should tread cautiously

Investors should tread cautiously
M Allirajan, TNN | Sep 23, 2011, 12.06AM IST

With the markets losing ground steadily, investors should buy equities at regular intervals. Safe havens such as fixed deposits and fixed maturity plans should be tapped only for the short-term. "People tend to be completely one-sided with asset allocation during such (turbulent) times," said Jayant Pai, vice president, Parag Parikh Financial Advisory Services. A one-sided approach, experts say, would spell trouble.

Take for instance gold as an asset class. Too many investors are chasing the metal because of economic uncertainty. The mad chase itself is pushing the prices up to record level, and a steep correction is imminent, said market watchers. "Investors should be cautious. They must not invest lump sum amounts in any asset class," says Anil Rego, CEO, Right Horizons, a wealth management firm.

In the case of bank FDs, investors should lock their money only for 3-6 months. "Choose short-term options and keep rolling them over. Don't lock your funds in three or five year instruments as equity markets would have turned for the better by that time," Pai said.

Fixed return products, such as non-convertible debentures issued by corporate houses, are more risky as in several cases they turn out to be mostly unsecured instruments. It is better to go for instruments issued by top-rated companies, said financial advisers.

While fixed maturity plans (FMPs) are attractive now, they would lose their sheen once the direct taxes code comes into effect, analysts said. Moreover, FMP returns, unlike bank FDs, are only indicative. The good old FDs may offer lower post-tax returns but offer an assured interest income besides ensuring safety of the principal amount.

Though investors would not lose money in debt mutual funds (MFs), they should also understand that products linked to NAV (net asset value) are not completely safe, say experts.

The biggest challenge is to make investors understand that they need to actually increase their overall exposure to equities during such turbulent market conditions, say advisers. "Investors should be buying more equity-related products as their proportion in the portfolio keeps coming down in a falling market," said Pai.

A systematic investment plan (SIP) in equity MFs spread over a year would work well, said Rego. Investors can also consider an SIP in income funds, he said. The bottom line is, don't go overboard on any asset class and follow the original asset allocation plan by making necessary adjustments.

http://timesofindia.indiatimes.com/business/india-business/Investors-should-tread-cautiously/articleshow/10083683.cms?prtpage=1

What is the US-Europe turmoil's impact on Asia?

Thursday September 22, 2011

What is the US-Europe turmoil's impact on Asia?

Can Asia stand alone and be decoupled from the West?

WHY should Asian stock markets react negatively if America does not create any new jobs? This is the question on everybody's lips, especially those who have argued that Asia can stand alone and Asian growth has decoupled from American growth.

But the news on Sept 5 that most Asian stock market indices dropped appreciably because America did not create jobs in August, must in fact mean that Asia cannot stand alone and is not decoupled from the West. The West can still influence what happens in most Asian economies including Singapore, Malaysia, the Philippines and Thailand because these Asian economies are linked to America and Europe through the real and financial economy.

The real economy in many Asian economies are dependent on and in fact compete for greenfield investments in the form of foreign direct investments (FDI) from America and Europe. They are also dependent on America to absorb the manufactured exports from the multinational corporations (MNCs) operating from Asia. Asian stock markets and bond markets are also open to foreign portfolio investments that are managed by foreign hedge funds.

In fact, it has been said the peaks and troughs of Bursa Malaysia are determined by foreign portfolio investments and the floor of the Bursa Malaysia is maintained by government investments in government-linked companies (GLCs) listed on Bursa Malaysia.

A man looking at a stock quotation board outside a brokerage in Tokyo. The Nikkei 225 index added 0.23% to 8 ,741.16 points yesterday. — Reuters

The foreign ownership of stocks in Bursa Malaysia, for example, is quite high and amounts to about 22%. Recently the bond market in Malaysia got a boost because of the large inflow of foreign portfolio investments into the bond market, including the sukuk bond market.

The Asian banking system is also linked to the West as there are numerous branches of foreign banks in Asia and an increasing number of Asian banks are setting up branches in the West to participate in the financing of trade. The financial links are then kept alive by the banks and the capital markets.

If America does not create jobs then it means that the recovery from the recession is slow and this means that incomes will not grow and hence consumption will not grow in America.

Most of the exports of East Asian countries are destined to the USA and Europe although there has been some growth in exports to China. If American consumption does not grow then the demand for manufactured goods from countries like Malaysia will fall. If this happens investor confidence in the Malaysian economy might turn negative. If American jobs do not grow, then American GDP will not grow and may even fall if the recession gets worse.

It has been found that Asian economies are very sensitive to changes in the GDP of the USA. A study by, for instance, Bank of America (BoA) Merrill Lynch found that if the US GDP declines by 1%, it will have the impact of reducing GDP by 1.7% in Singapore; 0.8% in Malaysia; 0.4% in Thailand, 0.3% in the Philippines and Indonesia. It is clear then that the more an economy is dependent on trade as a percentage of its GDP, the more it is affected by an economic crisis in the USA. The sensitivity of GDP growth to changes in the GDP of the USA is then a function of the trade dependence of the Asian countries. Singapore, for example, is more trade dependent than Indonesia and hence its GDP is more sensitive to movements in the GDP of the USA.

If Asian countries are not able to keep up their export momentum, their incomes will drop and their companies may not generate more profits.

In fact profits might fall and this may lead investors to sell the stocks of the companies negatively affected by the fall in exports. If incomes go down as a result of the drop in external demand then savings will drop and the amount of funds available for margin financing of stocks might fall. Tighter loan conditions or credit conditions may persuade investors to move out of the market and this may cause stock prices and the market index to fall.

So American jobs mean an increase in aggregate demand for manufactured goods from Asia and this translates into increased incomes and increased demand for Asian stocks.

If Asian exports decline then the demand for Asian currencies will decline and this will trigger a depreciation of the local Asian currencies, which will mean that foreign portfolio managers will not be attracted by the prospects of an appreciating local currency.

If the money supply declines as a result of the drop in exports, then interest rates will rise and this will cause the price of stocks and bonds to tumble because there is an inverse relation between asset values and interest rates.

The rate of job creation in a crisis economy such as America, which is linked to the real and financial economies of Asia, has therefore a significant effect on the stock market performance of the dependent Asian economies.

In August, for example, foreign investors sold more than RM3.8bil worth of Malaysian stocks because of the fall in the S&P credit rating of America and the European debt crisis because of the expectation that the external demand for Malaysian exports will decline. As a result, the FTSE Bursa Malaysia KLCI Index fell 6.6% in August.

The writer is a visiting senior research fellow at the Institute of South-East Asian Studies (ISEAS) in Singapore.

Market crash 'could hit within weeks', warn bankers

A more severe crash than the one triggered by the collapse of Lehman Brothers could be on the way, according to alarm signals in the credit markets.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008 Photo: Alamy

By Harry Wilson, and Philip Aldrick

9:50PM BST 24 Aug 2011

Insurance on the debt of several major European banks has now hit historic levels, higher even than those recorded during financial crisis caused by the US financial group's implosion nearly three years ago.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender's bonds against default is now £343,540.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

"The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive.

"I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.

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Despite this, bank shares rebounded on Wednesday, showing the growing disconnect between equity and credit investors. RBS closed up 9pc at 21.87p, while Barclays put on 3pc to 149.6p despite credit default swaps on the bank hitting a 12-month high. This mirrored the US trend, with Bank of America shares up 10pc in late Wall Street trade after a hitting a 12-month low on Tuesday over fears that it might have to raise as much as $200bn (£121bn). As with the European banks, the rebound in the share price was not reflected in the credit markets, where its CDS reached a 12-month high of 384.42 basis points.

European stock markets joined in the rally. The FTSE closed up 1.5pc at 5,206 on hopes the chance of a global recession had diminished. European shares hit a one-week high, with Germany's DAX closing up 2.7pc and France's CAC 1.8pc higher. The Dow Jones index edged higher on strong durable goods orders data as markets began to accept that the US Federal Reserve is unlikely to signal fresh stimulus at Jackson Hole this Friday.

Even Moody's decision to downgrade Japan's sovereign credit rating by one notch to Aa3 did little to damage global sentiment, although Tokyo's Nikkei closed down just over 1pc.

As stock market nerves settled, gold - which has recorded steady gains recently as investors seek a safe haven - fell 5.3pc to $1,777 in London.

Saturday August 27, 2011

Dark clouds over US and Europe

WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN

The world is adrift and it will continue to drift in the coming months or even years

Within the past couple of weeks, the world has changed. From a world so used to the United States playing a key leadership role in shaping global economic affairs to one going through a multi-speed recovery, with the emerging nations providing the source of growth and opportunity. This is a very rapid change indeed in historical time. What happened? First, the convergence of a series of events in Europe (contagion of the open ended debt crisis jolted France and spread to Italy and Spain, forcing theEuropean Central Bank or ECB to buy their bonds) and in the US (last minute lifting of the debt ceiling exposed the dysfunctional US political system, and the Standard & Poor's downgrade of the US credit rating) have led to a loss of confidence by markets across the Atlantic in the effectiveness of the political leadership in resolving key problems confronting the developed world. Second, these events combined with the coming together of poor economic outcomes involving the fragilities of recovery have pushed the world into what the president of the World Bank called “a new danger zone,” with no fresh solutions in sight. Growth in leading world economies slowed for the fourth consecutive quarter, gaining just 0.2% in 2Q'11 (0.3% in 1Q'11) according to the Organisation for Economic Cooperation and Development. The slowdown was marked in the euro area. Germany slackened to 0.3% in 2Q'11 (1.3% in 1Q'1) and France stalled at zero after 0.9% in 1Q'11. The US picked up to 0.3% (0.1% in 1Q'11), while Japan contracted 0.3% in 2Q'11 (-0.9% in 1Q'11).

The US slides

Recent data disclosures and revisions showed that the 2008 recession was deeper than first thought, and the subsequent recovery flatter. The outcome: Gross domestic product (GDP) has yet to regain its pre-recession peak. Worse, the feeble recovery appears to be petering out. Over the past year, output has grown a mere 1.6%, well below what most economists consider to be the US's underlying growth rate, a pace that has been in the past almost always followed by a recession. Over the past six-months, the US has managed to eke out an annualised growth of only 0.8%. This was completely unexpected. For months, the Federal Reserve had dismissed the economy's poor performance as a transitory reaction to Japan's natural disaster and oil price increases driven by turmoil in the Middle East. They now admit much stiffer headwinds are restraining the recovery, enough to keep growth painfully slow. Recent sentiment surveys and business activity indicators are consistent with expectations of a marked slowdown in US growth. Fiscal austerity will now prove to be a drag on growth for years. Housing isn't coming back quickly. Households are still trying to rid themselves of debt in the face of eroding wealth. Old relationships that used to drive recoveries seem unlikely to have the pull they used to have. Historically, consumers' confidence had tended to rebound after unemployment peaked. This time, it didn't happen. Unemployment peaked in Oct 2009 at 10.1% but confidence kept on sinking. The University of Michigan's index fell in early August to its lowest level since 1980. Thrown in is concern about the impact of the wild stock market on consumer spending. Indeed, equity volatility is having a negative impact on consumer psychology at a time of already weakening spending.

Three main reasons underlie why the Fed made the recent commitment to keep short-term interest rates near zero through mid-2013: (i) cuts all round to US growth forecasts for 2H11 and 2012; (ii) drop in oil and commodity prices plus lower expectations on the pace of recovery led to growing confidence inflation will stabilise; and (iii) rise in downside risks to growth in the face of deep concern about Europe's ability to resolve its sovereign debt problems. The Fed's intention is at least to keep financial conditions easy for the next 18 months. Also, it helps to ensure the slowly growing economy would not lapse into recession, even though it's already too close to the line; any shock could knock it into negative territory.

The critical key

Productivity in the US has been weakening. In 2Q11, non-farm business labour productivity fell 0.3%, the second straight quarterly drop. It rose only 0.8% from 2Q10. Over the past year, hourly wages have risen faster than productivity. This keeps the labour market sluggish and threatens potential recovery. It also means an erosion of living standards over the long haul. But, these numbers overstate productivity growth because of four factors: (a) upward bias in the data - eg the US spends the most on health care per capita in the world, yet without superior outcomes; (b) government spending on military and domestic security have risen sharply, yet they don't deliver useful goods and services that raise living standards; (c) labour force participation has fallen for years. Taking lower-paying jobs out of the mix raises productivity but does not create higher value-added jobs; and (d) off-shoring by US companies to China for example, but they don't enhance American productivity. Overall, they just overstate productivity. So, the US, like Europe, needs to actually raise productivity at the ground level if they are to really grow and reduce debt over the long-term. The next wave of innovation will probably rely on the world's current pool of scientific leaders - most of whom is still US-based.

US deficit is too large

The US budget deficit is now 9.1% of GDP. That's high by any standard. According to the impartial US Congressional Budget Office (CBO), even after returning to full employment, the deficit will remain so large its debt to GDP will rise to 190% by 2035! What happened? This deficit was 3.2% in 2008; rose to 8.9% in 2010, pushing the debt/GDP ratio from 40% to 62% in 2010. This “5.7% of GDP” rise in the deficit came about because of (i) a fall of “2.6% of GDP” in revenue (from 17.5% to 14.9% of GDP), and (ii) a rise of “3.1% of GDP” in spending (from 20.7% to 23.8% of GDP). According to the CBO, less than one-half of the rise in deficit was caused by the downturn of 2008-2010. Because of this cyclical decline, revenue collections were lower and outlays, higher (due to higher unemployment benefits and transfers to help those adversely affected). They in turn raise total demand and thus, help to stabilise the economy. These are called “automatic stabilisers.” In addition, the budget deficit also worsened because, even at full-employment, revenues would still fall and spending rise. So, the great recession did its damage.

Looking ahead, the Obama administration's budget proposals would add (according to CBO) US$3.8 trillion to the national debt between 2010 and 2020. This would raise the debt/GDP ratio to 90% reflecting limited higher spending, weaker revenues from middle and lower income taxpayers, offset in part by higher taxes on the rich. Even so, these are based on conservative assumptions regarding military spending, no new programmes and lower discretionary spending in “real” terms. No doubt, actual fiscal consolidation would imply much more spending cuts and higher revenues. According to Harvard's Prof M. Feldstein, increased revenues can only come about, without raising marginal tax rates, through what he calls cuts in “tax expenditures,” that is, reforming tax deductions (eg cutting farm subsidies, eliminating deductions for ethanol production, etc). Such a “balanced approach” to resolve the growing fiscal deficit will be hard to come-by given the political paralysis in Washington. Worse, the poisonous politics of the past two months have created a new sort of uncertainty. The tea partiers' refusal to compromise can, at worse, kill off the recovery. The only institution with power to avert danger is the Fed. But printing money can be counter-productive. Fiscal measures are the preferred way to go at this time. Even so, the US fiscal problems will mount beyond 2020 because of the rising cost of social security and medicare benefits. No doubt, fundamental reform is still needed for the long-term health of the US economy.

Eurozone stumbles

Looming large as a risk factor is Europe's long running sovereign debt saga, which is pummelling US and European financial markets and business confidence. So far, Europe's woes and the market turmoil it stirred are worrisome. The S&P 500 fell close to 5% last week extending losses of 15.4% over the previous three weeks, its worse streak of that length in 2 years, and down 17.6% from its 2011 high. The situation in Europe has been dictating much of the global markets' recent movements. The eurozone's dominant service sector was effectively stagnant in August after two years of growth, while manufacturing activity, which drove much of the recovery in the bloc shrank for the first time since September 2009. Latest indicators add to signs the slowdown is spreading beyond the periphery and taking root in its core members, including Germany. The Flash Markit Eurozone Services Purchasing Managers' Index (PMI) fell to 51.5 in August (51.6 in July), its lowest level since September 2009. The PMI, which measures activity ranging from restaurants to banks, is still above “50”, the mark dividing growth from contraction. However, PMI for manufacturing slid to 49.7 the first sub-50 reading since September 2009. Both services and manufacturing are struggling.

Going forward, poor data show neither Germany nor France (together making- up one-half the bloc's GDP) is going to be the locomotive. Indeed, the risks of “pushing” the region over the edge are significant. Germany faces an obvious slowdown and a possible lengthy stagnation.

European financial markets just came off a turbulent two weeks, with investors fearing the debt crisis could spread further if Europe's policy makers fail to implement institutional change and new structural supports for the currency bloc's finances. In the interim, the ECB has been picking up Italian and Spanish bonds to keep borrowing costs from soaring. The action has worked so far, but the ECB is only buying time and can't support markets indefinitely. So far, the rescue bill included 365 billion euros in official loans to Greece, Portugal and Ireland; the creation of a 440 billion euros rescue fund; and 96 billion euros in bond buying by the ECB. Despite this, market volatility and uncertainty prevail. Europe is being forced into an end-game with three possible outcomes: (a) disorderly break-up - possible if the peripherals fail in their fiscal reform or can no longer withstand stagnation arising from austerity; (b) greater fiscal union in return for strict national fiscal discipline; and (c) creation of a more compact and more economically coherent eurozone against contagion; this implies some weaker members will take “sabbatical” from the euro. My own sense is that the end-game will be neither simple nor orderly. Politicians will likely opt for a weak variant of fiscal union. After more pain, a smaller and more robust euro could emerge and avoid the euro's demise. Nobel Laureate Paul Krugman gives a “50% chance Greece would leave and a 10% odds of Italy following.”

Leaderless world

The crisis we now face is one of confidence. Starting with the markets across both sides of the Atlantic and in Japan. This lack of confidence reflected an accumulation of discouraging news, including feeble economic data in the US and Europe, and signs European banks are not so stable. The global rout seems to have its roots in free-floating anxiety about US dysfunctional politics and about euroland's economic and financial stability. Confidence is indeed shaky, already spreading to businesses and consumers, raising risks any fresh shock could be enough to push the US and European economies into recession. Business optimism, at best, is “softish.” Consumers are still deleveraging. Unfortunately, this general lack of confidence in global economic prospects could become a self-fulfilling prophecy. In the end, it's all about politics. The French philosopher Blaise Pascal contends politics have incentives that economics cannot understand. To act, politicians need consensus, which often does not emerge until the costs of inaction become highly visible. By then, it is often too late to avoid a much worse outcome. So, the demand for global leadership has never been greater. But, none is forthcoming not for the US, not from Europe; certainly not from Germany and France, or Britain.

The world is adrift. Unfortunately, it will continue to drift in the coming months, even years. Voters on both sides of the Atlantic need to demand more from their leaders than “continued austerity on autopilot.” After all, in politics, leadership is the art of making the impossible possible.

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email:starbizweek@thestar.com.my.

There's no easy way out of this economic mess

Friday, 12 August 2011

Sell! If you've got it, sell it! That was the cry of traders on the markets of London, New York and Singapore over the last two weeks and won't be far from their lips in the coming weeks.

You don't need me to tell you why stock markets have shed billions of pounds but the more pertinent question is how do we stop the rot and prevent the world's economy falling back into recession.

Well, if I knew the answer to that I'd be writing this from my yacht in the Bahamas and I can assure you that the environment in which I currently pen this article, couldn't be much further away from a sun-kissed, paradise Caribbean island (well, apart from a can of Lilt on my desk).

However, it certainly does seem that the measures currently being considered to prevent Recession II are a little wide of the mark.

Firstly, the 2007/2008 downturn was triggered by reckless lending and borrowing on a scale that defied belief.

There is no way you could claim that either is happening at the moment.

In fact, individuals and companies are looking at the shaky economic environment and putting their cash away for a rain(ier) day.

A basic law learned by A-level economics students dictates that to be operating efficiently, businesses need to leveraged, but having had their fingers burnt in 2008 most firms are rightly scared to take out big loans.

While a prudent outlook, such a move is not the tonic to reinvigorate an economy of any size.

Meanwhile - and I bow to The Wall Street Journal for this one - the previous slump was caused by a breakdown in the financial sector's integrity, while this one has been triggered by a breakdown of confidence that the various governments of the world's biggest economies can manage their finances.

So, different factors got us into this mess but how do we get out?

Well, in essence it's all down to the markets.

If governments pump more money into their economies the rest of us will lose even more confidence in them and the problem will be exacerbated.

The only thing they can do is cut spending further and that won't be a popular move.

But if markets fall low enough then investors will eventually be tempted to enter on the buy side - as they say in The City - and the economic cycle will be given a jump start.

Read more: http://www.belfasttelegraph.co.uk/business/opinion/editor-viewpoint/theres-no-easy-way-out-of-this-economic-mess-16035657.html#ixzz1UzfaZE3D

Biggest Emerging Stock Fund Outflows Since January 2008 May Be Buy Signal

l

By Michael Patterson and Jason Webb - Aug 12, 2011 11:08 PM GMT+0800

The biggest outflows from emerging- market equity funds since January 2008 may be a signal to buy stocks at the lowest valuations in 2 1/2 years.

Investors pulled $7.7 billion in the week to Aug. 10, the third-largest withdrawal on record and about 1.1 percent of assets under management, according to research firm EPFR Global. The MSCI Emerging Markets Index jumped an average 17 percent in the six months after outflows of this magnitude during the past decade, posting gains on 11 of 12 occasions, data compiled by EPFR Global and Bloomberg show.

The MSCI gauge sank as much as 20 percent from its May 2 high this week on concern theU.S. economy is stalling and Europe’s debt crisis is worsening. The slump sent valuations 30 percent below the 20 year average at 8.9 times analysts’ 12- month profit estimates, data compiled by Bloomberg and Morgan Stanley show. Fund outflows are a contrarian signal for rallies because they show pessimistic investors have already sold, according to Commerzbank AG’s Michael Ganske.

“When things are selling off and investors are very bearish and panicking then it’s clearly a good time to add positions,” Ganske, head of emerging-markets research at Commerzbank in London, said in a phone interview. “There is clearly a compelling argument to reassess exposure in emerging equities as valuations are very, very cheap.”

The strategy of buying emerging-market stocks after weeks when outflows exceeded 1 percent of assets under management produced average gains of 2.2 percent in one month, 8.5 percent in three months and 28 percent in 12 months, according to data compiled by EPFR Global and Bloomberg.

History Shows Gains

Investors have also been rewarded for buying when the MSCI emerging index fell below 9 times earnings. The last dip to those levels in October 2008 was followed by a 60 percent rally during the next 12 months, data compiled by Bloomberg show. The gauge climbed 44 percent in the year after valuations tumbled that low in August 1998, the month Russia defaulted on $40 billion of debt, the data show.

The MSCI index was little changed today after two days of gains. Reports today showed French economic growth stalled last quarter and euro-region industrial production unexpectedly fell in June.

The 21-country gauge has retreated about 5 percent this week after an unprecedented downgrade of America’s top credit rating by Standard & Poor’s and signs that Italy and Spainmay struggle to refinance debt. The MSCI Emerging Markets Energy Index sank 7 percent, the most among 10 industry gauges, as oil prices tumbled.

‘Growth Scare’

A further retreat in commodities may spur more outflows from developing-nation equity funds, according to John-Paul Smith, emerging-market strategist at Deutsche Bank AG in London.

“Over the short term it’s most likely a by-product of the global turmoil rather than a change of view on the relative attractions of emerging-market equities,” Smith said. “The real damage is likely to happen further out if, as we expect, investors become more negative about the fundamental prospects of both emerging markets and commodities.”

The MSCI index fell more than 15 percent in a month after fund outflows reached more than one percent of assets in August 2001, while the gauge retreated 6.5 percent when withdrawals exceeded that level in May 2006, data compiled by EPFR and Bloomberg show.

This week’s retreat in emerging-market share prices has produced buying opportunities and slowing growth in the developed world may ease inflation pressures in developing nations, said Ivo Kovachev, an emerging-markets money manager at London-based JO Hambro Capital Management Ltd.

The People’s Bank of China will leave borrowing costs unchanged for the rest of this year, according to eight of 10 analysts surveyed by Bloomberg this week. The Bank of Korea keptinterest rates unchanged for a second month on Aug. 11, while Indonesia stayed on hold Aug. 9.

“There has been a growth scare in the world,” said Kovachev. “But perhaps a bit perversely, it may help emerging markets because this year they were suffering from overheating and inflation risk.”

http://www.bloomberg.com/news/2011-08-12/biggest-emerging-stock-fund-outflows-since-january-2008-may-be-buy-signal.html

A week that knocked the financial world off its axis

Just another quiet summer week, really. The FTSE 100 started at 5,247 and ended at 5,320. It was hardly worth coming out of the sea to check your BlackBerry.

The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors. 

By Tom Stevenson, on the Markets

2:40PM BST 13 Aug 2011

Comment

If only. The modest net gain for stock market investors disguised the most dramatic few days in the markets since 2008. If someone had offered no change as Wall Street was tumbling 6.7pc last Monday, few would have turned it down, I suspect.

That is perhaps the first lesson to be learned – the remarkable capacity for markets to confound investors' expectations. If the same patterns played out each time, we would have got the hang of it by now. But each crisis is different enough to ensure that history never quiet repeats itself, only rhymes.

I have drawn a few other conclusions from this fascinating week. First, while developed market shares are undoubtedly cheap they may remain so, and for good reason. It is quite unprecedented, that Fed chairman Ben Bernanke should have been prepared to pre-commit to near zero interest rates two years into the future. This speaks volumes about his pessimism regarding America's economic outlook. The persistent unemployment and low growth implicit in his assessment is incompatible with the Government's assumptions in its deficit reduction plan or many of Wall Street's earnings forecasts.

I think we are seeing a change in the investment environment on a par with the birth of the cult of the equity in the 1950s. That was when, for the first time, equities began yielding less than fixed income securities on the grounds that investors considered the growth potential of share dividends outweighed the extra risk borne by equity investors.

In recent years, the rare occasions when equities have yielded more than government securities have been viewed as a buy signal for shares, but in a low-growth, low-interest rate environment, this premium could become the norm again.

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Having been disappointed in recent years by the vain wait for jam tomorrow, in the form of capital growth, investors are likely to demand jam today, in the form of a high and sustainable income.

This renewed focus on income makes sense because, as the chart clearly shows, shares paying high dividends are not simply interesting to investors seeking to replace the income they can no longer find in cash or by investing in government securities. Income is both the main contributor to the total return from shares and an excellent indicator of future outperformance.

The chart shows the relative performance of Europe's high and low yielding shares but I could have shown a similar chart for Japan, where income has provided an escape from two lost decades for investors.

Looking forward, careful stock selection will be key to investment success. The sell-off has been indiscriminate and this is throwing up plenty of opportunities: good companies at great prices. I wonder whether we might not look back with some disbelief at a time when BP was available at just 5.5 times expected earnings or AstraZeneca at 5.7 times with a dividend yield of 6.5pc. Investor sentiment, measured using a combination of indicators such as market volatility, directors' dealings and fund flows, last week hit its lowest point since the collapse of Lehman Brothers .

What has also become clear this week is that we now inhabit a two-speed world. The transformation of emerging markets, especially those in Asia, continues regardless of the volatility in Western stock markets. It is interesting that the two worlds' markets have not become de-linked in the same way as their underlying economies have. I would be surprised if that did not change soon. The growth differential between Asia outside Japan and the developed world before, during and since the financial crisis argues for a much greater bias towards the region.

The unstoppable shift from West to East has important implications for stock markets closer to home because a key part of any analysis of companies quoted in London and New York is now their exposure to the growth potential of emerging markets. It is one reason why German stocks continue to look more interesting than their counterparts in other parts of Europe. Companies such as BMW and Siemens have understood and grasped the emerging market opportunity.

Meanwhile, let's hope tomorrow really does bring just another quiet summer week. We could all do with one.

Tom Stevenson is an investment director at Fidelity International. The views expressed are his own.


http://www.telegraph.co.uk/finance/comment/tom-stevenson/8699694/A-week-that-knocked-the-financial-world-off-its-axis.html