We are likely to see some mid-cap out-performance, particularly once the January results give local investors an idea of the story for FY08. Growth expectations are currently around 15 per cent for FY08 on the previous year. However, in the mid-cap space this may be far higher. FIIs may also start to approach saturation of investible limits (due to foreign investment limits) in the large-cap space, which will lead to filtering down into more mid-cap names.
The risk to this situation is the 1 lakh crore IPO pipeline, which may absorb some of the FII demand and deflect from a focus on mid-caps. Additionally, the liquidity issues in mid-caps continue to be an issue for large investors. Finally, in a market like India, momentum tends to take hold at times and we may see further blow-out in large-cap premiums before we see mean reversion take place. If one were to step out from the current trend favouring large-caps and set the vision further, mid-caps represent the opportunity in that space.
OptiMix
Indeed, it seems quite logical that if the world's economies are increasingly intertwined and interdependent they will become less dependent on the United States. From a structural perspective we even feel that fundamental long-term strategies should increasingly be adapted to this inevitable trend. Of course, the extent to which the rest of the world's economies "decouple" from the United States will depend on how much they are "desynchronised" from the US economic cycle and on other specific factors that are endogenous to the various pieces of the global macroeconomic puzzle. No doubt that emerging Asia is still the key piece to this puzzle. This currently seems to be the main concern of market observers.
BNP Paribas Asset Management
Emerging markets (EM) has historically been vulnerable to deteriorating economic and financial conditions in the United States and other developed countries. Slower growth, tighter liquidity, and heightened risk aversion in mature markets generally mean lower commodity prices, less capital flows, and higher interest rates for EM borrowers — conditions that helped produce some spectacular financial crises in the past dozen years. Not a pretty picture, and one that begs the question of what lies around the corner.
Given this backdrop, it is interesting that 2007 growth estimates for emerging market economies continue to be robust, suggesting a potential divergence this time for EM. Certainly the nature of the slowdown (hard vs. soft) in the US is critical to the performance of the EM economies and will shape expectations for EM growth and the performance of the asset class. But fundamental, endogenous changes in the emerging countries suggest EM is far better equipped to deal with a G-3 slowdown in the current cycle than in the past.
PIMCO bonds Emerging Markets Watch