One of the most difficult decisions for a fund manager in times of global uncertainty is to decide how much cash they should hold. Even if the manager feels that markets will grossly under perform it is hard to put a large part of the portfolio in cash because investors are paying them to manage equities.
Take the example of the present situation. Chinese slowdown, commodity price declines and depreciating currencies are taking massive toll on some of the emerging and frontier markets. In particular, economies with commodity focus like Russia, Nigeria and others like Argentina are getting pummeled. Even countries considered to have enough reserves to weather the storm like Saudia Arabia had its own share of scares. The only countries performing relatively better are those that are commodity importers and less correlated with the global economy. In the frontier universe this would include countries like Pakistan, Bangladesh and Sri Lanka all three of which commodity importers.
The problem however is in the fact that equities in these markets are not cheap. Thus a fund manager has 3 options overall. Allocate more to these countries even though stocks are expensive because the global volatility can run for a long period. Second option is to hold cash and try to time the market bottom (if we believe that markets are cyclical and sooner or later commodities will rebound). Final option is to start allocating risk assets to the battered countries from now on because markets always move faster than economic news. The idea is to take some near term hits on the portfolio but make money on the medium to long term.
These are all difficult decisions and just like most other things involving finance more an art than science. So far it seems to me that investors feel that Chinese situation will stay pretty bad and thus commodities will remain weak. As a result, people will continue to put money in countries with strong external accounts, limited fiscal deficit, declining inflation (through lower commodity price) etc. However, as countries like Nigeria and Argentina keep on under performing there should be a point when the prices will too low to ignore.