The countries there with currency pegs have to print more money when the US prints more money. We think there’s an opportunity in overweighting markets that have been laggards, but which are going to catch up relative to their peers.” However Hu stresses that this is a tactical play, and is glad that Seres’ mandate allows it to buy portfolio insurance, such as put options on indexes, and also retreat to up to 80 per cent cash. His view is in line with Fidelity Investments’ commentator Tom Stevenson, who last month said that the “leak of new money” into already booming emerging markets “will not end well”. However he warned investors it may be too early to retreat from the BRIC markets.
“There is a difference between knowing that a situation is unsustainable and thinking that it will change any time soon. It is far too early…to be talking about bubbles in many of the markets that will benefit from America’s easy money export policy.” Stevenson did acknowledge that QE2 would encourage spending in the US, pointing out that a 1 percentage point reduction in real bond yields would push up asset prices by 20 per cent, increasing the propensity of consumers to spend as their net wealth rises. But he did worry it would force economies with currencies pegged to the US dollar, such as China and Hong Kong, to maintain a monetary policy that is “wholly inappropriate in light of their strong growth”.
However the founder of wealth-weighted indexing, David Morris of Global Wealth Allocation, said worries about a Chinese bubble in particular were overdone, given that the country’s GWA “wealth weighting” – which takes into account book value, cash flow, net earnings and dividends – was only slightly lower than its weighting in all-country indexes based on market capitalisation. From the fixed-income managers’ point of view, the second round of quantitative easing had helped to “segregate” the market, according to Kapstream Capital chief executive, Kumar Palghat.