Permal Asset Management Inc., a Legg Mason Inc. unit that invests clients’ money in hedge funds, plans to increase allocations to U.S. equity and global macro funds as emerging countries struggle to cap a rise in inflation.
“In emerging markets, the macro economic conditions are now negative,” Isaac Souede, New York-based chairman and chief executive officer of Permal, said in an interview. “The American equity market should do better than the emerging market equities until these countries manage to engineer soft landings.”
The Standard & Poor’s 500-stock index of U.S. stocks rose 13 percent in 2010, compared with declines in emerging markets such as China and Brazil. Prospects for faster U.S. economic growth have prompted analysts including those at Goldman Sachs Group Inc. and HSBC Holdings Plc to raise their forecasts for where the S&P 500 will finish 2011.
Capital inflows, a driving force of the recovery in emerging countries, now pose risks to global growth as they can trigger abrupt currency fluctuations that may do “lasting damage” to some nations, the World Bank said yesterday. The Washington-based bank expressed concerns about the possibility of asset bubbles in the East Asia and Pacific regions, whose largest economies include China, Indonesia, Thailand and Malaysia.
Permal will invest more in macro funds to protect its portfolios from price fluctuations in emerging markets, amid concerns central banks in Asia will raise rates to curb inflation, Souede, 59, said in Singapore. Macro funds seek to profit from broad economic trends by trading currencies, bonds, stocks and commodities.
Permal, which manages $22 billion, has invested about $8 billion in macro funds and more than $1.2 billion in U.S. long-short funds, whose managers can bet on rising and falling stocks, Souede said.
“In the U.S., you’ll see us having more long-short equity managers because we think it’s an opportune time to make money with that style in the market that’s more rewarding to stock picking,” he said.
The firm plans this year to buy hedge fund stakes from “sellers that are in distress” at a deep discount, the chief executive said. Permal is also seeking to invest in managers that bet on European distressed assets, he said.
Hedge-fund managers in the region, whom he met this week, are most concerned about inflation in Asia and what governments are doing to tackle price pressures, Souede said.
“There’s nothing that gets people madder than having to deal with food inflation,” he said.
Food-price inflation in Asia, excluding Japan, in November was at its highest level in the past decade except for 2007-2008, Credit Suisse Group AG said. World food prices reached an all-time high in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt.
Inflation in China accelerated to 5.1 percent in November from a year earlier, the fastest pace in 28 months, driven by higher food costs. China’s stocks slumped last year after the government ordered banks to set aside more reserves six times and boosted interest rates twice to tame inflation and curb asset bubbles after record gains in lending and property prices.
“Short term, I’m not bullish on China,” Souede said. “But in the medium term I’m bullish, though they’d have to get through this exercise of engineering a soft landing given an economy that grows at 8 percent to 9 percent.”
Still, Permal’s clients are showing “the most interest” to put money into China-focused hedge funds through the firm, following gains from its investments in these managers, he said.