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Goldman is warning of more pain ahead. Don't listen

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[HONG KONG] Whenever there's a sharp global selloff sparked by US equities, Goldman Sachs Group comes out warning of more volatility and pain ahead.

In July, when there was a brief dip and the Cboe Volatility Index jumped, the venerable investment bank said selling from risk-parity funds, which buy government bonds to hedge against stock portfolios, could lead to more offloading of shares. The S&P 500 has managed to hum along since.

On Monday, when the Dow suffered its worst intraday points plunge in history in late afternoon trading, Goldman pointed its finger at selling by managed-futures funds, or long-short strategy funds aimed at capturing market trends. If the rout continues, there could be further unwinding from these portfolios to the tune of about US$190 billion globally, Goldman said.

Asia was a sea of red on Tuesday. In January, emerging markets saw close to US$14 billion of fund inflows, so some unwinding is happening. Markets in Vietnam are down more than 10 per cent this week, after a 53 per cent gain in 2017. Foreigners pumped a record US$1 billion into the South-east Asian frontier market last year.

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But as an emerging Asia bull, I have to say a few things.

Let's not forget Goldman makes money when markets are volatile. Lloyd Blankfein must be rubbing his hands with glee now the VIX is approaching 2015 flash crash levels.

And second, emerging Asia, and China in particular, offers more protection against the rise of the machines. On Monday, bargain hunters from the mainland bought a record US$1.6 billion of Hong Kong stocks through exchange links with Shanghai and Shenzhen, an option that wasn't available a few years ago. As I argued, so long as the US dollar remains weak, the city's shares will remain a fertile hunting ground.

In November, China vowed to curb risks in the country's US$15 trillion asset-management industry by asking funds to morph into staid mutual portfolios. The new measures saw an increase in long-only mutual funds, and in flows to Hong Kong stocks viewed as cheaper and safer, especially from investors burned by growth plays in Shenzhen. That mainland money is continuing to flow, with net buying of more than HK$5 billion (S$844.5 million) as at the noon break on Tuesday. Without that support, the Hang Seng Index would look a lot worse.

According to a Hong Kong Exchanges & Clearing Ltd survey, Chinese investors accounted for 9 per cent of total market turnover in July, putting them on equal footing with UK and US investors. That presence can only be stronger now.

It's also important to remember that emerging Asia never quite recovered from the 2013 capital flight sparked by fears of a US interest rate rise. Some markets, including China, Thailand and Malaysia, are still a way from their peak.

The MSCI Asia ex-Japan Index's 7.5 per cent jump in January may have been too good to be true, but bears like Goldman should focus their attention on the US Stock and bond valuations there look a lot more stretched.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG

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