Fund of hedge funds manager International Asset Management says it continues to favour the opportunity set for long/short equity managers focused on the Asian and emerging markets.
Morten Spenner, chief executive at International Asset Management, says there is a high likelihood of slow economic growth in the major developed countries.
This level of recovery is not sufficiently strong to bring forward monetary tightening but nor is it so weak that it will prevent reasonable earnings growth. Furthermore, loose monetary policy is allowing companies to borrow cheaply.
Faster growth is anticipated in emerging markets. Equity market valuations are reasonable, inefficiency is high and there has been paralysing investor risk aversion.
Spenner says Asian and emerging markets continue to offer the highest secular growth opportunities while the US economy remains at the head of the recovery amongst the other developed countries.
While QE2 has already had an effect on the US dollar and the government bond market, it is also likely to boost the equity markets and increase flows into emerging markets as well.
IAM continues to favour managers with a variable bias within the strategy because of the preference for managers that are nimble and flexible in market conditions that are likely to continue to change. Able trading-orientated managers should also continue to perform well.
With regards to credit, Spenner says the low rate environment has continued to encourage investors to buy yield which has resulted in further spread tightening in credit to more normalised levels. The future direction from here is less certain.
Structural market inefficiencies brought about by the stratified traditional investor base continues to create opportunities through mispricings. While bond and loan prices have generally risen, there remain areas of undervaluation for long positions.
Differentiation in credit quality, continued valuation anomalies and potential for further stress continue to create a plentiful opportunity set, albeit within a more difficult trading environment of late. IAM continues to favour managers in this strategy that have a long short bias.
Spenner says macro managers continue to have the largest exposures to themes in the fixed income markets. There has been much movement to capture in these markets during the year. However, more recently exposure levels have been moved a little more in favour of foreign exchange, equity and to a lesser extent commodity markets and fixed income exposure is generally more varied.
Spenner says the background to markets should continue to provide a constructive opportunity set for macro managers and the return outlook therefore continues to be positive.
