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Outflows from EMs could continue for next few weeks and even months: Anna Stupnytska

China and Asian countries better positioned among EMs, says Head of Global Macro & Investment Strategy at Fidelity International.

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Last Updated: Apr 01, 2020, 04.20 PM IST
Anna Stupnytska-1200
How is the situation on ground in London? How is the NHS handling the situation?
The situation is as challenging as an outlier. London is in the lockdown and cases are rising and the NHS is under increasing pressure. Of course, the government measures are helping and more and more people are staying at home. But clearly, this is something that will continue spreading and we have not seen the peak of infection in the UK yet.

How are global market investors positioned right now? Is there risk off sentiment? Do you see it continue for a prolonged period of time?
We have seen a very fast-paced adjustment in the financial market over the past few weeks and really big moves related to investors changing their positions and selling out of risk assets and in some cases out of safe havens funds, they are moving into cash. It seems there has been lesser stabilisation at least in certain days in certain asset classes. We had a very very big fast-paced adjustment and now with that out of the way, some asset classes seem to be supported by central bank interventions.

The Federal Reserve has committed to QE infinity. They have been buying government bonds and have also started buying corporate bonds. That asset class seems to be a little bit more stable now. There is a bit more differentiation in the market today, relative to what we saw even a week or two ago. But the general feeling is still risk off and in our funds at least, we are not piling on risk. We do not think this is the bottom of the market yet and we are being cautious. Most investors are just waiting and trying to gauge the virus related uncertainty and its impact on the economy.
Emering markets facing virus-related shock, external demand shock and the oil supply and demand shock.

-Anna Stupnytska

Indian markets have seen huge outflows -- Rs 65,000 crore net in last couple of months, FIIs are selling out of Emerging Markets (EMs), and India is also on the receiving end. How much more outflows can EMs as a pocket see in the next couple of months?
It is very difficult to estimate but I do not think we are at the end of it. As you know, the epidemics started in China, spread across Asia and now is in the developed countries in the west and is also spreading across the rest of the emerging world. It is only now that the EMs are facing this dramatic domestic shock of public health emergency and a very dramatic external shock in terms of the collapse in global demand. On top of this, we also had a dramatic oil shock.

So, these three shocks are working through the system -- the virus related shock, the external demand shock and the oil supply and demand shock. This is a really tough environment for EMs. It is likely that we will continue seeing the outflows from the asset class over the next few weeks or perhaps months. It is not going to be indiscriminate forever. At some point, there will be differentiation between countries that have the most ammunition or flows in terms of policy response and the countries that have flawless decisions and are better equipped to tackle the local crisis. The later category is likely to do better. Looking across the EMs, I think China and Asian countries are probably better positioned than EMs in Latin America for example.

A lot of opinions are coming in from global names like Jeffrey Gundlach. Howard Marks also wrote a fresh memo overnight. They are sounding extremely cautious. Seth Klarman just a week back started buying from the market and taking fresh funds after a nine-year gap. How are blue-blooded investors approaching this selloff?
Again, there is a lot of differentiation. The key aspect is the time horizon. What I hear right now is that longer term investors who look to invest over the next 5 to 10 years or even beyond that, are starting to adjust the valuations in certain pockets in the market.

What you have seen is a big adjustment in the entry points in the debt space -- the corporate bond market and also in equity. We could hear more of these very scary stories over the next few weeks and months. By the way, the consensus opinion out there is still a bit more on the shorts in terms of the economic impact and also upcoming markets over the next few weeks.

I agree with the big investors. They are right to caution other investors and the market that the worst is still to come. If you have a short-term time horizon and are trying to invest for the next few weeks or months, this does cause problems. But if you are a longer term investor, then you are right to be cautious but may be missing some opportunities in the market.
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