“In a crisis, all correlations go to 1”
Last week, I highlighted the divergence that is appearing between countries which are highly leveraged and those that have relatively low amounts of debt per capita. Against that context, it is interesting to note that, the more fear that exists in the markets, the more global market correlations tend to 1; i.e. markets tend to get more correlated during crises. If you accept these two hypotheses and then try and put them together, you get an interesting paradox, and potential opportunity. On the one hand, the fundamentals suggest divergence of growth prospects for different countries. On the other hand, in the midst of a crisis, like the European debt crisis, global markets tend to perform similarly. That would suggest that the current market conditions potentially present a particularly good time to invest in companies in certain emerging markets. In our opinion, the thesis for investing in the growth of India’s domestic economy is relatively independent of the European debt crisis and, accordingly, the macro market driven declines in the stock prices of select Indian companies are presenting compelling buying opportunities.
During the week, the following news items were of relevance to some of the companies we follow:
- Preliminary IFIC statistics for May indicated a 3.4% decline in Canadian mutual funds industry net assets.
- CI Financial reported gross sales of retail managed funds in May of $1.1 billion and net sales of $265 million. End of May Fee Earning Assets of $87 billion were about 3.6% lower than at the end of April 2010.
- AGF Management reported gross sales of mutual funds in May of $162 million and net redemptions of $204 million. Total Assets Under Management at the end of May were $42.9 billion or about 4.5% lower than at the end of April 2010.
- On June 1, 2010, Invesco Limited announced the completion of its previously announced acquisition of Morgan Stanley’s retail asset management business, including Van Kampen Investments. Invesco announced that they expect the transaction to yield total EPS accretion in the first and second year after close of 21 cents and 23 cents, respectively; this is an increase in the first 12 months accretion of 4 cents relative to what had previously been announced. This transaction not only strengthens Invesco’s already broad product lineup and add economies of scale, but the strategic relationship with Morgan Stanley also strengthens the distributions of Invesco’s products.
- The saying is “in a crisis, all correlations go to 1”. For the month to date May 27, 2010, India’s markets had experienced approximately US$2.3 billion of net outflows from Foreign Institutional Investors which has brought the YTD net inflow down to US$4.3 billion. That is a material swing in flows and is consistent with the flight of capital to “safety” during periods of high global uncertainty. Of course, fund flows impact share prices and the Indian markets have declined accordingly. However, it is important to note that India’s exposure to trade, especially with Europe, is relatively small; i.e. the India domestic growth thesis is relatively independent of the factors that are driving current global fund flows. Macro market volatility provides the opportunity to purchase mispriced assets.
