| Both equity and debt fund managers believe that 3 per cent is a neutral US Federal Reserve funds rate, or a rate that is neither stimulative nor restrictive. Note that the Fed funds rate is currently at 1 per cent. |
| The strange thing is that expectations of higher interest rates are not matched by expectations of robust economic growth. Only a net 9 per cent of the fund managers surveyed believed that the global economy would get stronger in the next twelve months. |
| That's against a net 48 per cent expecting a stronger economy last March. The gloomy macro outlook is matched at the corporate level "" only a net 11 per cent expect corporate profits worldwide to improve over the next twelve months, a figure that was as high as 47 per cent in April. |
| The net percentage of managers reporting net inflows into equity funds in the last three months has fallen to 20 per cent, compared to 27 per cent last month, 36 per cent in April and 39 per cent in March. (Net percentage of managers reporting net inflows = 33 per cent of managers reporting net inflows -13 per cent of managers reporting net outflows). |
| The good news is that a net 15 per cent of fund managers said that global emerging markets were the most undervalued, slightly better than the 14 per cent in May. |
| The bad news is that more fund managers believe that the Japanese and European markets are more attractive in terms of valuation. To the question "Which region would you most like to overweight/ underweight in the next twelve months?" only 15 per cent said they would most like to overweight emerging markets, while 16 per cent said they would most like to underweight the region. |
| That net 1 per cent of managers underweighting the region is better than the previous month's figure of 6 per cent. But it's still a far cry from the net 30 per cent overweight on Japan or the net 8 per cent overweight on Europe. |
| A net 21 per cent of managers said they were overweight on emerging markets equities in June, compared with 20 per cent last month and 57 per cent in April. |
| More important is the fact that a net 3 per cent say they would decrease their weighting in emerging markets "" that's an indication there could be more selling. Nevertheless, this metric was 11 per cent in May, when there was a bloodbath in emerging markets, so it's to be hoped that the worst is over. |
| Foreign funds' trades |
| Foreign institutional investors (FIIs) have taken to the derivatives markets very keenly. On a gross basis, they account for around 45-50 per cent of total outstanding in the derivatives market. |
| Therefore, it makes a lot of sense to look at FII trades in this segment of the market in conjunction with the cash segment in order to get a complete picture. |
| It's interesting to note that FII activity in the derivatives market differs starkly from that in the cash segment. |
| Despite the huge outflow in the month of May, FIIs have been net buyers of equity (cash segment) to the tune of Rs 15,925 crore year-till-date. But in the derivatives segment, the net inflow was just Rs 80 crore. |
| In the month of May, while FIIs pulled out Rs 3,250 crore from the cash segment, there were inflows of Rs 1,090 crore in the derivatives segment. FII activity in the options segment is negligible, which means that a big chunk of the turnover on the derivatives segment would be for a cash-futures arbitrage. |
| Even in earlier months like January and April, the trend in the derivatives market was opposite that in the cash segment. At the same time, the high level of outstandings suggests there could be a number of hedging positions as well. |
| Another interesting point is that FII trades are relatively much higher in the cash segment. Average daily turnover of FIIs in the derivatives segment in 2004 till date was around Rs 610 crore, much lower than the Rs 1,440 crore turnover in the cash segment. |
| Evidently, the number of FIIs using the derivatives market is rather low. |
| With contributions from Mobis Philipose |
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