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investors scramble for yield in markets awash with central bank
liquidity, their eyes continue to be drawn toward the glitter
of emerging markets, including those in the Middle East and
South Asia, where Ive been trolling for the past few
weeks to probe the links between portfolio strategy and tail
risk. Few countries offer as much fertile ground for such
ruminations as Pakistan.
The Islamic Republic has its own special charm for
diplomats, soldiers and spies, who worry about different risks
emerging from the country and its growing stockpile of nuclear
weapons. But below the Bloomberg radar, Pakistan may also have
the potential to perturbate global financial markets. My time
in Islamabad was brightened by winter sunshine and darkened by
Assassinations, mayhem and lack of rule of law in some
emerging-market locations often make them a marginal sideshow
to global macro markets, says Thomas McGlade, portfolio
manager at London-based hedge fund Prologue Capital. Even
Syria can hardly get the attention of the markets, so the low
boil that is constant in Pakistan rarely registers. But
its the security and nuclear dynamic which could push
Pakistan to the forefront.
My diplomat friends arent eager to see a crisis in
Pakistan, but some traders take a different view. Global macro
hedge funds are starving from a lack of volatility, which is
their lifeblood. Europes financial markets have healed
dramatically since Mario Draghi promised last year to do
whatever it takes to save the euro. The decision by Washington
lawmakers to avoid any fiscal cliffdiving has provided a
similar tonic on the other side of the Atlantic. Chinas
policymakers have engineered a soft landing for their economy.
The civil war in Syria hasnt spilled over into
instability in the Gulf or posed a threat to global oil
supplies. And on top of it all, central banks in Europe, Japan,
the U.K. and the U.S. continue to pump liquidity willy-nilly
into global financial markets, forcing everybody into
higher-risk, higher-return assets.
All in all, its a pretty benign environment for the
global economy but one that makes macro traders squirm. Returns
at many hedge funds lagged their benchmarks in 2012, and a lot
of investors are still smarting about the 2 percent fees.
We could really use some volatility right now, one
London-based trader complained to me over a curbside lager at a
Mount Street pub in Mayfair. Its hard to make money
when things are this quiet.