We all know about the carry trade unwind. What’s playing out now is an unwinding of the bear trade. Have been meeting many hedge fund managers in New York, on and off the record. Many of them have been caught on the wrong foot by this September rally. They were either under invested or short emerging markets and the sheer force of the pullback has stunned them. The momentum that we have seen over the last fortnight is largely a factor of these guys rushing back to make up for lost ground. The net long positions of the hedge fund basket are almost back to the old highs and so a large part of the immediate rebalancing is probably done.
The bigger and longer-term propellant for our market, indeed all emerging markets, could be the rebalancing of traditional investors, only funds and giant institutions who have pitiful exposure to the new world. The way some of the traditional FIIs into India have behaved over the last 2 years is a good case in point. Most of them have been skeptical, cautious, if not downright bearish. Since the Sensex crossed 10,000, they have been wary of valuations. Now, it takes courage to change a view at prices that are some 70 per cent higher, doesn’t it? Sadly, the truth for them is that the market will force them to change else they will lose their jobs as money managers.
Some of the large global funds are still wondering if emerging markets are cyclical and the good times won’t last too long. The small exposure to EMs is almost grudgingly there. This represents a much larger body of money than the fast-moving hedge-fund world. When you meet these guys, you sense the skepticism, yet the first germ of doubt seems to have been planted on whether they are missing out on the biggest opportunity of the next five years.
This is perhaps the reason why the market is forming higher bottoms in every correction. And why most recoveries are fairly V shaped. Just too many people need to get in. As an Indian investor it may be prudent to hold on to the good stocks. You can almost see that there will come a time when the global guys will make a beeline to buy them from you. One must wait for that day and cash in. A bit of profit taking here and there is fine, but don’t miss the woods for the trees. Think of it as a giant reverse book-building exercise from an MNC. When they want the stock they have to take it away at “your” price, right?
(The writer is Executive Editor, CNBC-TV 18)