Investors Look Toward Safer Options as Ground Shifts

Investors Look Toward Safer Options as Ground Shifts


Updated Jan. 29, 2014 10:37 p.m. ET


Just one month into 2014, investors from Illinois to Istanbul are finding the tide going out fast for stocks and other riskier investments.

The excitement over the Super Bowl is coming in sharp contrast to the fear in the market. U.S. stocks are rebounding this morning, but the selling pressure is hitting in waves across the globe. Tom Lauricella reports on MoneyBeat.

After years of unprecedented monetary stimulus propping up the world’s financial markets, investors are now confronting the reality of an end to the Federal Reserve’s bond-buying program, which, as expected, the central bank reduced by another $10 billion on Wednesday.

The Fed’s moves are exacerbating the currency declines faced by a number of emerging-market countries already struggling with domestic economic and political woes of their own making. Several emerging-market central banks in recent days have tried—and failed—to stem slides in their currencies.

As investors flee those markets, they also have moved out of U.S. stocks, which are seen as more risky than some other assets. The Dow Jones Industrial Average sank for the sixth out of seven sessions, losing 1.2% to 15738.79. The blue-chip index has fallen 5% since hitting a record high at the close of 2013.

At the same time, the U.S. bond market has surprised many investors by staging a strong rally. Fueled in part by investors seeking the relative safety of U.S. government bonds, the yield on the 10-year U.S. Treasury note, which declines as prices rise, dropped below 2.7% for the first time since November.

Asian markets slid in early trading Thursday, with Japan down 3%. Australia fell 1.8%, Hong Kong was down 1.4% and South Korea dropped 1.3%.

Many investors remain bullish on the prospects for U.S. stocks, thanks to the relative health of U.S. companies.

Some even argue that the long-simmering troubles in emerging markets will draw global investors to U.S. stocks.

But the landscape seems to have shifted from one where unprecedented central-bank stimulus enabled markets to steamroll past issues that might have otherwise spooked investors.

Now, investors are facing markets that appear at greater risk of hitting potholes.

“There were a lot of rose-colored glasses in the market,” said Michael Fredericks, portfolio manager of BlackRock Inc.’s $6 billion Multi-Asset Income Fund.

Many investors had come into 2014 expecting an easy year for U.S. stocks, Mr. Fredericks said. While sentiment doesn’t appear to be turning bearish, “what we’re seeing now is some questioning of that confidence.”

To many, this bumpier ride for global markets is a healthy shift. It is a sign, they say, of markets adjusting to life without a dependence on central banks propping up the financial system.

“The Fed, from mid-2009 to 2013, was saying ‘Take more risk, we’ve got your back,’ ” said Wayne Lin, who helps oversee $7.5 billion as a portfolio manager at Legg Mason’s global asset-allocation group. “Now that’s being reversed and you’ve got to play by more normal rules. You’ve got to get used to things going up and down.”

The troubles hitting many emerging markets have been brewing since last year, when the Fed first signaled that it would scale back its stimulus efforts. The news sent emerging-markets stocks and currencies tumbling.

These issues have now come to a boil, mostly in countries whose domestic policies have increased their vulnerability to an exodus of foreign capital.

In Argentina and Venezuela, governments have overspent on subsidies, driving up inflation and creating large current-account deficits. South Africa has been dealing with labor unrest in its mining sector, where strikes have hurt output and the government was forced to raise wages during an economic slowdown.

In Turkey, a drive by Prime Minister Recep Tayyip Erdogan to keep interest rates low to help the economy amid rising inflation has backfired. An effort by the country’s central bank to stand up the ailing lira with a massive rate rise provided only a fleeting benefit to the Turkish currency.

South Africa followed suit with a smaller increase of its own but couldn’t prevent the rand from slumping to a five-year low. In India, a surprise rate rise earlier this week didn’t shield the rupee from losses on Wednesday.

Even currencies such as the Brazilian real, Mexican peso, Polish zloty and Hungarian forint fell heavily, suggesting that traders and investors are seeking to avoid riskier bets in general.

Analysts say that Turkey and South Africa’s rate increases could only raise the pressure on other central banks in emerging markets with fiscal concerns to take similar steps.

urther rate increases may be necessary to stabilize markets and draw buyers back in, said David Griffiths, a portfolio manager at Stone Harbor Investment Partners, which manages $62.3 billion of assets.

The prospect of higher interest rates in the U.S. means emerging-market countries are finding it more difficult to hold on to money from investors that flocked there in search of higher returns.

As that money heads out, it puts sharp downward pressure on their currencies.

“We had seen a lot of yield-chasing” in emerging markets, said John Briggs, head of cross asset strategy at RBS Americas. “And more than any other area, with emerging markets, when people want to leave the room if there is a fire, the exit door is pretty small.”

In the U.S., softer-than-expected economic news in recent weeks has some investors rethinking their views on the strength of the recovery even as the Fed pulls back on its stimulus efforts.

The Fed’s latest $10 billion reduction brings its monthly bond-buying program down to $65 billion.

Barry Knapp, head of U.S. equity portfolio strategy at Barclays PLC, said the kinds of hiccups being seen in the market now are likely to continue as the Fed shifts gears on monetary policy.

During the latter months of 2013, “the tailwinds were just incredible,” he said, pointing to still easy-money policies from the Fed, stronger economic data and earnings forecasts. “Now the tailwinds are shifting and these pullbacks have to happen,” he said.

Mr. Knapp added that historically, for stocks, “they turned out to be pretty good buying opportunities.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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