The April 2014 Monthly Hedge Funds Trends report from Deutsche Bank Markets Prime Finance puts the recent rally in emerging markets in perspective.
“The Global Strategy team highlights an emerging markets recovery for the month of March from oversold levels,” says the note. “They reason that although the bounce might not be fundamentally driven, some investors may be interpreting weakness in the Chinese economy as a precursor to easier monetary and/or fiscal policy.”
Global hedge fund returns in March
Globally, during March, median hedge fund returns were led by emerging market equities which gained 1.02%, followed by fixed income strategies (+0.72%). The laggards were equity long-short strategies (-0.35%), macro (-0.20%) and CTA/managed futures (-1.69%).
Regional performance YTD
Interestingly, on a regional basis, credit, fixed income and distressed were the top performing categories in the Americas during March. Fixed income, macro and credit were the top three in Europe, while multi-strategy worked best in Asia.
Year to date regional returns are shown below.
Emerging Markets rally out of whack with fundamentals
Deutsche Bank attributes the Emerging Market rally to the “almost universal pessimism” surrounding EM equities around end-January, which ultimately led to the perception that these were oversold, triggering a relief rally.
Another factor that worked in favor of Emerging Market was the market’s anticipation of fiscal or monetary stimulus emanating from the Chinese government to counteract growth concerns.
“We can think of no good fundamental reason to become more positive towards GEM,” avers Deutsche Bank, however.
Brazil and Russia governance issues
Brazil’s recent rally is dismissed by Deutsche Bank as one without positive news overflow, and simply a bounce within a secular bear market. Russia is likely to be simply correcting from the panic selloff that was sparked by its Crimean adventure.
“In both Brazil and Russia, we would argue that the situation from both a sovereign and corporate governance perspective is continuing to deteriorate,” says Deutsche Bank.
India is already overbought and the market is overpricing how much reform can be reasonably expected from the new BJP government that may be installed in case a coalition is cobbled together.
On China, Deutsche Bank is particularly bearish, recommending that investors “run very underweight positions in Chinese equities.”
“H2 2013 industrial company results indicate further deterioration is likely in the Chinese economy, which underpins our negative view towards GEM,” says the research note. “The FY2013 results suggest that a significant shift is occurring among Chinese corporate in the crucial industrial and material sectors which are coming under increasing operational and financial pressures.”
Full report from Deutsche Bank can be found here https://www.managedfunds.org/wp-content/uploads/2014/04/Deutsche-Bank-Markets-Prime-Finance-Monthly-Hedge-Fund-Trends-April-20-.pdf