Robert Parker, Vice Chairman, Credit Suisse Asset Management believes that the cash levels are at record high worldwide, more than in 2001-02. According to him, leveraged investors have significantly reduced positions. He feels that global economy, specially G3 countries, will face a tough time in coming two-three months.
Parker said that Lehman may still have to write down over USD 30 billion worth of securities. According to him, news reports of Lehman talks with Korean bank are proving tough and Lehman might hive off difficult mortgage assets into separate company.
Parker doesn't see pools of heavy leverage in Asian markets. He said that China has seen continued capital outflow in Mutual Funds industry. He sees limited downside risk in global equities. According to him, there will be a sustainable rally in global equities only in Q2CY09, once earnings improve. He sees chances of trading rallies in India and World over next three-six months.
Excerpts from CNBC-TV18’s exclusive interview with Robert Parker:
Q: Much has happened since Monday first with Fannie and Freddie and now concerns with Lehman Brothers, how are you reading the global atmosphere right now?
A: Investor sentiments are very poor and we have models where we gauge how much cash investors are running and how much leverage investment is there in the market. Those indicators show that the cash worldwide is at a record high.
It’s quite interesting if you look at cash levels today relative to the last bear market of 2000 to 2003, the cash levels today are much higher than what they were at the worst points of 2001 and 2002. Also what’s very interesting over the past month is that we have seen leveraged investors significantly reduce their positions and there is a lot of talk about the role of hedge funds in the markets globally.
Hedge funds have been forced to reduce leverage and that in turn is in a wave of selling pressure. On Monday, the initial market reaction to the nationalization or conservatorship of Freddie Mac and Fannie Mae was very positive. But subsequently, that has met a wave of selling and to some extent justifiably so. Global economy particularly the G3 countries, notably America and Europe, face a period of quite severe economic weakness at least for the next two-three months.
Q: How are you reading the Lehman Brothers situation at this point in time and what would that mean for sentiment in the near term?
A: If we look at the newsflow over the last few weeks, firstly, there has been a lot of speculation that when Lehman will announce a further significant write down on its asset book related to the US mortgage market and that’s not just residential mortgages but also commercial mortgage backed securities in its quarterly results. The evidence available suggests that Lehman still has an excess of USD 30 billion of securities, which are difficult to value, trade.
Lehman strategy has been very different from the strategy of other banks, which have had heavy exposure to the mortgage problems in US. If we look at Merrill Lynch and UBS, they have attempted to clean up their balance sheets quite successfully. Three months ago, Merrill Lynch sold of a very significant part of its mortgage book at a distressed price level.
Lehman has tried to reduce its positions but in a more orderly way. The market is concerned about news reports of the discussions that Lehman Brother’s were having with the Korean Development Bank. With potentially a Korean consortium, it would appear that those discussions are proving quite difficult particularly at the light of statements by the Korean regulatory authorities that they want Korean Development Bank to be very cautious in these discussions. In means that the Korean regulator does not give a stamp of approval on these discussions.
There is talk in the markets that when Lehman comes out with its results, it will try and separate it’s book of difficult mortgage assets into a separate company. In previous financial crisis particularly in the 1980’s and 1990’s, the concept of good bank and bad bank was a very successful concept. The idea that Lehman might put these mortgage assets into a separate company is a very attractive idea but the market is concerned as to whether that is going to happen or not.
Q: Just to get back to the point that you were making about deleveraging with specific reference to Asia funds or emerging market funds, is it your sense that there might be much more by way of selling pressure?
Parker said that Lehman may still have to write down over USD 30 billion worth of securities. According to him, news reports of Lehman talks with Korean bank are proving tough and Lehman might hive off difficult mortgage assets into separate company.
Parker doesn't see pools of heavy leverage in Asian markets. He said that China has seen continued capital outflow in Mutual Funds industry. He sees limited downside risk in global equities. According to him, there will be a sustainable rally in global equities only in Q2CY09, once earnings improve. He sees chances of trading rallies in India and World over next three-six months.
Excerpts from CNBC-TV18’s exclusive interview with Robert Parker:
Q: Much has happened since Monday first with Fannie and Freddie and now concerns with Lehman Brothers, how are you reading the global atmosphere right now?
A: Investor sentiments are very poor and we have models where we gauge how much cash investors are running and how much leverage investment is there in the market. Those indicators show that the cash worldwide is at a record high.
It’s quite interesting if you look at cash levels today relative to the last bear market of 2000 to 2003, the cash levels today are much higher than what they were at the worst points of 2001 and 2002. Also what’s very interesting over the past month is that we have seen leveraged investors significantly reduce their positions and there is a lot of talk about the role of hedge funds in the markets globally.
Hedge funds have been forced to reduce leverage and that in turn is in a wave of selling pressure. On Monday, the initial market reaction to the nationalization or conservatorship of Freddie Mac and Fannie Mae was very positive. But subsequently, that has met a wave of selling and to some extent justifiably so. Global economy particularly the G3 countries, notably America and Europe, face a period of quite severe economic weakness at least for the next two-three months.
Q: How are you reading the Lehman Brothers situation at this point in time and what would that mean for sentiment in the near term?
A: If we look at the newsflow over the last few weeks, firstly, there has been a lot of speculation that when Lehman will announce a further significant write down on its asset book related to the US mortgage market and that’s not just residential mortgages but also commercial mortgage backed securities in its quarterly results. The evidence available suggests that Lehman still has an excess of USD 30 billion of securities, which are difficult to value, trade.
Lehman strategy has been very different from the strategy of other banks, which have had heavy exposure to the mortgage problems in US. If we look at Merrill Lynch and UBS, they have attempted to clean up their balance sheets quite successfully. Three months ago, Merrill Lynch sold of a very significant part of its mortgage book at a distressed price level.
Lehman has tried to reduce its positions but in a more orderly way. The market is concerned about news reports of the discussions that Lehman Brother’s were having with the Korean Development Bank. With potentially a Korean consortium, it would appear that those discussions are proving quite difficult particularly at the light of statements by the Korean regulatory authorities that they want Korean Development Bank to be very cautious in these discussions. In means that the Korean regulator does not give a stamp of approval on these discussions.
There is talk in the markets that when Lehman comes out with its results, it will try and separate it’s book of difficult mortgage assets into a separate company. In previous financial crisis particularly in the 1980’s and 1990’s, the concept of good bank and bad bank was a very successful concept. The idea that Lehman might put these mortgage assets into a separate company is a very attractive idea but the market is concerned as to whether that is going to happen or not.
Q: Just to get back to the point that you were making about deleveraging with specific reference to Asia funds or emerging market funds, is it your sense that there might be much more by way of selling pressure?
A: The deleveraging over the last two months since June has been in trades, which have been very concentrated. The biggest leverage trade in June was investors including hedge funds, long commodity stocks and short financial stocks. There has been a major squeeze on those positions since June and associated with declining commodity prices and high level of volatility but we have seen a improvement over the past six weeks in the financial services sector.
With respect to Asia, there has been a trend capital outflow by foreign investors and this is the feature of Indian market over last six months. Asian markets particularly India and China had a foreign capital overhang back in the first quarter of this year. That overhang doesn’t exist. So, concept of leverage divestment is more of an issue in American and European Market. I don’t see pools of heavy over-leverage in the Asian Markets.
Q: India has actually been an outperformer in the past month or so even though it has not had the good side of flows. What is your own sense of how the next few months might shape up for India versus the couple of other emerging markets, developed countries?
A: India has been an outperformer last month particularly if you look at China. If you look at India versus China, both economies are commodity importers and the trade in the first half of the year has been long. In past months, you have seen divergence between India and China. There are number of factors due to that, first of all in China you have seen continued capital outflow in the mutual fund industry. On the other hand, you have not seen that heavy continued capital outflow here in India.
Q: Given the fact that you have talked about cash levels being at record points in this juncture what is your sense of where cash would distribute itself and when will this happen as hedge fund managers divide strategies for returns?
A: India has been an outperformer last month particularly if you look at China. If you look at India versus China, both economies are commodity importers and the trade in the first half of the year has been long. In past months, you have seen divergence between India and China. There are number of factors due to that, first of all in China you have seen continued capital outflow in the mutual fund industry. On the other hand, you have not seen that heavy continued capital outflow here in India.
Q: Given the fact that you have talked about cash levels being at record points in this juncture what is your sense of where cash would distribute itself and when will this happen as hedge fund managers divide strategies for returns?
A: The downside risk in global equity markets is very limited. If you look at the situation today, investor cash at record levels, price earnings ratios are much more reasonable than they were two months ago. If you look globally, the relationship between global fixed income, global bonds and global equities is a stretched relationship. Equity is cheap, bond is expensive. We need evidence that the corporate earnings growth is going to move to positive momentum to have a sustainable start to rally in global equity markets.
It will probably happen in Q2 of 2009. So, there are a number of factors in place suggesting that the downside risk in markets is low in India. This is not like March 2003, which of course was the start of a four-year bull market trend. We are probably going to have trading rallies and trend will be sideways moving in Indian and the global markets over the next three months and possibly going into Q1 of 2009. Then we will have prospects of an improvement in economic growth, corporate earnings growth. We can have the ground being formed for a sustained bull equity market rally. Over the next month or so, it will be a trading rally. We have got very bad equity market conditions but from this level, further downside is limited.
It will probably happen in Q2 of 2009. So, there are a number of factors in place suggesting that the downside risk in markets is low in India. This is not like March 2003, which of course was the start of a four-year bull market trend. We are probably going to have trading rallies and trend will be sideways moving in Indian and the global markets over the next three months and possibly going into Q1 of 2009. Then we will have prospects of an improvement in economic growth, corporate earnings growth. We can have the ground being formed for a sustained bull equity market rally. Over the next month or so, it will be a trading rally. We have got very bad equity market conditions but from this level, further downside is limited.
Source:http://www.moneycontrol.com/india/news/fii-view/lehman-may-write-down-over-30-bn-securities-credit-suisse/22/30/355602
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