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Shifting of funds to guard against volatility

The bullish sentiment towards US equities still remains. The strategy is changing from an outright exposure to allocations in broader based instruments, with the exposure to US equities, without the volatility such as mutual funds.

The weakness towards the end of trading over the past two-days indicates that money managers are moving money off the table due to the S&P 500 staying at these high levels. The year-to-date performance of US equities at 26% has outperformed its European and Asian peers, with the exception of the Nikkei at 50%.

The lack of significant retracement shows that money managers are guarding against volatility, without losing out on the potential further upward movements. This brings on the question, would the equity markets be able to achieve this performance next year with earnings growth matching high valuations.

The Fed’s next meeting on 17-18 December 2013 is unlikely to bring anything new to the table. Although, US data such as the Markit PMI and ISM manufacturing data showed an increase, the employment rate is still weak. This is most likely still the focus for the Fed and the accommodative monetary policy will remain.

From this perspective, investors will look at other markets which they have ignored. The currency devaluation, along with lagging performance in the equity indices may look appealing – such as Southeast Asia. The summer sell-off in the emerging Asian markets has given investors time to understand the differences of each country focusing on countries that have current account surplus and a stronger economic outlook.

The foreign institutional investment fund flows, shows clear signs that the Southeast Asian markets are still not attracting foreign interests to their equity markets. Investors are selling out of these markets with net outflows for the year and favouring other Asian markets. There is bias towards Taiwan and South Korea with significant inflows during October and November. Taiwan has attracted more funds with US$7.7b than South Korea’s US$6.5b net inflows, so far this year.

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