Andy Xie of Morgan Stanley believes that market fundamentals have been exaggerated by liquidity and that markets have entered a sluggish phase in equities.
Xie feels that the bull market may suffer as money turns costlier. He expects another wave of adjustment in Asian equities. Xie does not sense any massive redemptions from fund managers.
Excerpts from CNBC-TV18's exclusive interview with Andy Xie:
What is your sense? Have we entered a bear market, is that the substance of your report?
I think we have entered a bear market. Inflation all over the world is rising. So that is forcing Central Banks to raise interest rates. In the last few years, the bull market has been flooded by cheaper money. So as cheaper money diminishes, the financial markets need time to adjust. We are entering a sluggish space for quite a while.
Is your assessment based just on liquidity tightening or do you think fundamentals of emerging markets also support such a bearish phase?
Fundamentals have been exaggerated by liquidity. If you look at corporate earnings, commodities and financials tend to be the leaders but their earnings are based on
Commodities and their earnings is based on price inflation. Banks are based on very rapid wealth growth due to excess liquidity, so the earnings have been exaggerated quite a bit.
Hence, I think that when this bullish cycle is over, one may see a decline in earnings for some of those sectors and that would also lead to an economic slowdown.
You have made a point in your report that you are expecting a lot more redemption. Have you seen a lot already, especially in the emerging markets, by way of redemptions?
No, not really. I was visiting fund managers in the US last week and I did not sense massive redemption. So far, what we have seen in the market is leveraging. A lot of investors, particularly the hedge funds, leverage up by borrowing money, many equity funds borrowed over 100%.
I think we are going to see some redemption but to what extent, we do not know, but a lot of fund managers out there are not really adding a lot of value and they are leading the business of chasing. We could have another wave of adjustment coming.
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