Investing Daily

Relaxing for a few days on a Greek island somewhere in the Aegean Sea, I can't claim to be on on top of the most recent market developments. But, in addition to an idyllic setting, my vacation also offered me the opportunity to talk shop with two asset managers who run hedge funds worth a combined USD10 billion. This week I'll share their insights into what the "big boys" are thinking about these days.

Through a relative's contacts in London, I arranged to spend three days with these managers, enjoying the sun and sea as well as discussing macro issues regarding the world markets and economies. The intensity with which these two pros approach the investment process and their ability to disengage emotionally from their holdings is instructive to individual investors--emotional attachment has wrought much ruin.
The two invest globally, taking positions between USD50 to USD 100 million, both short and long. Neither manager invests in US securities.

Both concurred that the all of the big bets this year were in Asia, especially China and India--a good thing because this year the two markets are up 82 percent and 59 percent, respectively, in US dollars.  These managers have (literally) bought into my longstanding argument that the economic decoupling between the big emerging economies and the Western developed ones is underway. That decoupling will take a while but will become a reality. For now, China's economy is expected to perform well throughout this process, lifting the rest of Asia.

As the above assessment seems to be shared by other institutional investors around the world, China and India likely will be some of the best performing markets in the world this year.

In terms of developed markets, Germany and Japan are their favorites, a view that meshes with my writings in The Silk Road Investor. Because the German economy avoided the credit and real estate boom that other parts of Europe went through, its exposure to these problems is limited. In fact, the DAX is up 10 percent this year, making it one of the best performing developed markets.

Japan is a rerating story that will take longer to play out; a lot will be decided in the elections taking place at the end of August. The initial decisions of the new government can give the market the confidence it needs to try and discount any potential positive changes. Japan is also up 10 percent this year in US dollars, outperforming the 8 percent gain notched by the S&P 500. Note that this performance has occurred even though the longer-term future of the Japanese economy remains uncertain.

Speaking of the uncertainty, all parties questioned whether the US economy has what it takes to return to its previous strength as well as its reputation as the sole guarantor of economic stability and quality. That won't necessarily impact the US market in the near term, but these thoughts could have long-term implications.

Although the fund managers have less money committed in smaller Asian markets, that doesn't mean there aren't opportunities off the beaten path. The Indonesian market, which I discussed at length in Indonesian Exposure, is up 91 percent this year in US dollars.

I continue to favor other small markets and expect them to play catch up later this year--especially if global markets decide to take a breather in August. Since the beginning of 2009, Taiwan is up 53 percent, Singapore is up 48 percent, and The Philippines have gained 45 percent.

Which markets did the hedge fund managers like the least? Well, there was very little talk about Latin America, though Brazil was mentioned in passing. To date, the Brazilian market is up 43 percent in local currency terms and 75 percent in US dollars.

And neither fund manager mentioned Russia nor do they invest there. This is in direct contrast to last year when the world rushed to invest in the Russian market--of course, most of this money went up in flames after the massive selloff  broke out last September. That scared off a lot of institutional money, but history has demonstrated that when Russia is the worst performing market one year it's often one of the best performing the year after. The Russian market is up a respectable 55 percent in USD this year, slightly off a high of 70 percent.

Russia is a longtime favorite of mine. I continue to recommend that investors add to positions during times of weakness; the long-term macro story of the rerating of the "Bear" remains compelling.

Fond memories aside, what did I take away from these discussions? China and India remain hedge-fund favorites and are a hit with institutional investors that take a long view. I continue to believe that the next investment bubble will form in these markets. But that's a story for the next decade.