Losing flavour?

Global investors are rotating holdings into undervalued assets

What is common to Indian and Thai stocks, gold, the Nasdaq and the Australian dollar? They are all yesterday's global investment favourites that have lost their lustre this year.

All of them had delivered outstanding returns last year, but have been in negative territory in 2004. Investors have booked profits in these assets and have started rotating their money into new avenues. This year's gainers: Russian and East European stocks, Japan, Malaysia, Taiwan, silver, and palladium.

The MSCI World index has gained a mere 0.975 per cent so far this year (till March 19), but the Emerging Markets index has gained 6.636 per cent, the main contributor being Eastern Europe. MSCI's Emerging Europe index is up a staggering 21.106 per cent this year.

Even more significantly, this index moved up by 5.968 per cent in the month to March 19, at a time when the Asian index, last year's darling among global investors, was down 1.5 per cent, the Emerging Markets index down 0.65 per cent, and the US index declined 3.1 per cent. The Russian stock market has moved up 30 per cent this year, compared with a decline of 2.2 per cent in the quarter ending December 31, 2003.

Among Asian markets, Malaysia has seen a rise of 14 per cent this year compared to a rise of 8.2 per cent in the previous quarter. Taiwan's market index has moved up by 15.7 per cent this year, in spite of crucial elections (although the election result saw a sharp sell-off on Monday), compared with a small rise of 4.9 per cent in the last quarter of last year.

Contrast the behaviour of yesterday's favourite markets: The Thai market has fallen 11.8 per cent in 2004, compared to a rise of 33.5 per cent in the last quarter of 2003; the Sensex has gone down by 6.7 per cent, compared to a rise of 31.1 per cent in Q4, 2003; the Philippines market has gone nowhere this year, although it rose by 11.2 per cent in the last quarter of 2003.

What's true for stockmarkets is also true for some other asset classes. The price of gold, for instance, went up to around $417 an ounce at end-December 2003, compared to $384 an ounce three months earlier, a gain of 8.6 per cent. This year, it is struggling to regain its earlier levels. Compare the price of silver, which has gained as much as 26 per cent this year, moving up to a six-year high of $7.62 an ounce.

Similarly, while the rate of rise in platinum prices has slowed down this year, palladium prices have risen by 42 per cent, compared with a slight decline in the fourth quarter of last year.

Compare also the Australian dollar, which appreciated from 1.47660 to the US dollar at the end of September last year to 1.33510 to the US dollar by the end of the year. Currently, it stands at 1.33650 to the dollar, the correction coming in the last month.

Are investors merely churning their portfolios, or does the sluggish behaviour of the markets this month point to something deeper, possibly even the end of the bull run? After all, the MSCI World Index has fallen 2.2 per cent in the month to March 19. Worries about the US economy, the threat of terrorism and concerns about the overheating of the Chinese economy could prove to be a trigger for a downturn.

But not all markets have been similarly affected this month. The MSCI index for Russia has gained 8.6 per cent this month, the Czech index has gained 4.3 per cent and the index for Hungary has moved up by 4 per cent. The Japanese and Malaysian indices have gained by 4.3 per cent and 2.2 per cent respectively during the past month. Silver and palladium prices are rising.

Perhaps more importantly, monetary conditions continue to be easy, with no change in the easy money policy in the US. In other words, the flood of liquidity continues to be intact. All that it's doing is rotating into new assets.