Bond market experts believe that Standard & Poor’s reduction of the US credit rating to AA+, may make it more difficult for other top-rated countries to keep their AAA rankings. According to Mohamed A El- Erian, CEO at Pimco, the world’s largest bond fund, ?the downgrade by S&P may well raise questions about other members of the dwindling AAA club.?
Under the circumstances, US Treasurys could well remain the safe haven they have been even if yields are slipping to new lows. And although global growth is slowing and expected to come in at sub-3% for 2011, fund managers are not in a hurry to write off equities, saying that there?s little chance of a collapse though deterioration in the fundamentals may need earnings to be revised.
After Dow Jones crashed 513 points last Thursday, emerging markets guru Mark Mobius said stocks are ?looking better?. The executive chairman of Templeton Asset Management?s emerging markets group, said with real interest rates in negative territory around the world in most cases, we are much better off with equities.
?The emerging markets are in much better shape than developed countries,? Mobius said, adding ?if you look at the gross domestic product levels, foreign exchange reserves, emerging markets are in a very, very sweet spot.?
Yields on ten-year US Treasurys have been driven down to fresh lows of 2.5% levels while yields on Bunds are in the region of 2.4%. Last week, yields on the 10-year bonds in the UK were driven down to their lowest in history. Indeed, Marc Faber, publisher of the Gloom, Boom & Doom report, expects a rally in the US Standard & Poor?s 500 Index of about 40-to-50 points. Markets are ?extremely oversold,? Faber said.
He said he expects a ?snap-back? rally in the S&P 500 although he doesn?t expect new highs for equities in 2011.
Market watchers point out that with a hard landing in China almost ruled out after it reported a 9.5% growth in its GDP for the June quarter, Asian economies are on stronger ground than many western nations. Moreover, Asia doesn?t really have too much funding exposure to the eurozone nor is it too dependent on that region for borrowings ? the average Asian bank has less than 10% of total loans in foreign currency. Moreover, China alone has reserves of over $3 trillion, more than adequate to take care of Asia ex-Japan?s entire financing needs of $600 billion over the next couple of years.
The MSCI Asia Pacific Index tumbled 7.8% to 126.08 last week and has given up 8.4% this year.
India remains among the bottom four in the emerging markets universe with FII inflows so far this year at just about $2 billion. Latest data released for the June quarter indicate that FIIs have marginally reduced their holdings of Indian equities ? by 20 basis and hold 14.9%, slightly short of the highs seen last quarter at 15.1%. ?If the US and Europe can muddle through and oil prices stay where they are then that?s good news, ?said Andrew Holland, CEO, Ambit Capital. Holland added that the markets would begin to take note of the fact that interest rate tightening in India is nearing the end and also that stock prices are now much lower.
