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By Jason Stipp | 06-04-2010 12:33 PM

Sri-Kumar: We're in a Tread-Water Market

TCW's Komal Sri-Kumar and Adam Coppersmith describe their defensive portfolio positions, including short positions on the euro emerging markets, and defensive fixed-income positions.

Jason Stipp: It seems like there is a lot of negativity in your thesis. Is the emerging market region of the world potentially a silver lining for us? A lot of folks have been looking to emerging markets recently for the prospects of perhaps greater growth than they might get in developed markets. My question for you and my concern is that to what extent is trouble in the developed markets trouble for the emerging markets, which depend on us for their exports?

Komal S. Sri-Kumar: I think the trouble in the United States, Europe, and generally in the developed markets translate very quickly to emerging markets. I don't believe that the emerging markets can decouple from the industrialized nations, and I took this position several months ago. I have been saying, for example, that the Shanghai Stock Exchange index cannot last, and we are down quite sharply. I believe that the Indian Stock Exchange is due for a correction as well. Both these economies are going to continue to tighten monetary and fiscal policy; they have to, to prevent the speculative bubble. And for all of those reasons I believe that emerging markets are not going to do well. And once again we put our money where our belief is, and what we have done is in some of our funds we have taken short positions in emerging market equities and they have in turn helped us very well in terms of performance.

Stipp: It sounds like a lot of the opportunities you had mentioned gold, emerging markets, are on the short side. You are bearish on those areas, at least in the shorter term. Are you finding any opportunity out there on the long side? And a second question for you is, how are you positioning your portfolios for some of the other concerns and risks out there? How are you protecting on the downside?

Sri-Kumar: This is a tread-water market as far as we are concerned. Meaning that you want to stay alive, you want to keep your head above water, and you want to do whatever you can for the next six months, nine months to earn your keep, so to say. And from that viewpoint, what we see is that we are looking at areas on the ETFs, which can give us some benefit in terms of being aggressive on that side. For instance, a Double Short Euro has been very positive for us and that is again you would think an aggressive position which we have taken and it's benefiting us.

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