In emerging markets, something bad happens every 3 to 4 years, and something very bad happens every 7 to 8 years. Bad things tend to happen when periods of high growth store up imbalances which accumulate till breaking point or hide fundamental structural flaws. More often than not, they are borne from lack of diversification or hedging of risk; or the distortion of the price mechanism and deviations from free markets.

Much has been said about China saving the world from economic armageddon. Well I have news for the China bulls, the macro-economic data that you are pinning your investment hopes on are no where near as good as you think. In fact they are probably quite far off the mark.

The politicians in Canberra are probably as popular in Beijing at the moment as Gordon Ramsay is in Australian news studios. Having rebuffed the bid for Ozminerals’ Prominent Hill, they will also be held culpable in Chinese eyes for Rio’s (partially) commercially driven snub to Chinalco, which was then made much worse by the announcement of the Rio/BHP iron ore joint venture, neatly creating a duopoly from the prior three player market. 

After five decades, the Institute for Financial Analysis has polled its members, who now no longer believe in efficient markets – or, more specifically, that share prices do not reflect all available information.

On 8 June, I wrote in the Straits Times, a newspaper in Singapore that Temasek Holdings should not shy away from risk despite recent losses. Here is the article: 

Five years ago India had an election. There was a surprise victory for the Congress-led coalition over the BJP and the market fell 20% in a day. This marked the low and the market subsequently quadrupled over the next three and a half years. As it turned out the effect of having to accommodate some of the left-leaning coalition partners on economic policy was somewhere between immaterial and zero.

Although I have never been a marketer, and am firmly on the buy side, being part of First Avenue Partners, effectively a marketing firm active in hedge funds, private equity and real estate, as well as a hedge fund seeder, gives me a very interesting view on what investors want. Being responsible for due diligence and manager selection for the hedge fund practice, I spend most of my time looking at the hedge fund industry, but I also keep track on the private equity and real estate fund management industry as there are often interesting overlaps.

The month of June is replete with hedge fund conferences. Conferences earlier this year were either poorly attended, or else investors attended them for the free breakfast or lunch, a chance to commiserate with fellow sufferers of the global financial crisis/hedge fund witch hunt. What a difference a couple of months of rising markets make. A palpable optimism is creeping back into the industry.

Two weeks have gone and the bullish sentiment persists. Although US markets have technically gone nowhere, the Dow has range traded between 8,200 - 8,500 and the SPY at 900-920, Asian markets have taken the glass is half full mentality by the horns, rising when there is good news out of the US and not falling on bad news. 

Should not a capitalist system punish as well as reward? We saw the devastation left by Lehman when it filed and concluded that some banks are too big or too interconnected to fail. 

“I like Asia.  You don’t have to sell me the story but I’m going to wait until the next leg down before making any allocation”.

‘Reduce beta in May and go away’ may not have quite the lyrical simplicity of the original old market adage, but may well prove to be appropriate this year.