Robert Parker of Credit Suisse AMC expects to see a minor correction -- about 5-8 percent -- in global equities over the next one-month period on the back of weak economic data.
Parker expects a mid-year pick up in BRIC markets. "One of the big trades of the second half of the year will be the reversal of that long developed market’s short emerging market trade," he says.
He feels that lower commodity price environment is positive for India. He told CNBC-TV18 in an interview that the Indian market, which was looking overvalued at the beginning of this year, is now looking reasonably valued currently.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: Is the trade of long US equities and short commodities set to continue considering that we have been getting the series of downbeat US economic data and that big fall yesterday in the Dow?
A: The first point to make is it is not just temporarily weak US economic data. We have seen over the last two to three weeks a range of weak euro zone data and particularly weak data out of France. We are yet to see, although the data out of Japan will pick up sharply fairly from June onwards, recent data out of Japan does not show that pick up and yesterday we saw a weaker than expected GDP number out of China.
So, the first point to make is that it is not just weaker US data, it is global weaker data. That is why what we will see over at lease the next month is a minor correction. A minor correction I would quantify as probably 5-8 percent in global equity markets and no further downside in commodity prices.
So, to come back to your question long US equities, short commodities has worked very well over the past month. I do think however that the downside in commodity prices has got further to go and we have to be a prepared for a global equity correction over the next month.
Q: Are you getting a sense that the trade of long developed markets and shorting EMs like India may have got overcrowded over last one month and that is why maybe we are seeing a bit of a reversal of that?
A: One of the big trades of the second half of the year will be the reversal of that long developed market’s short emerging market trade. One is absolutely correct to say that the trade over at least the last six to nine months of long developed markets, short emerging markets is now a very crowded trade.
One caveat to that comment is obviously that within emerging markets we have had significant divergence between the Brazil, Russia, India and China (BRIC) markets and the non-BRIC markets. Particularly this year we have had markets like Brazil YTD down 13 percent. We have had negative returns so far this year in China, India and Russia.
Whereas other markets in Southeast Asia notably the Philippines and Indonesia continue to advance very strongly. So, I think the answer to your question is not immediately, because markets are going to be dominated over the balance of April and May by this equity market correction.
However, as we go into mid-year we will see a pick up in the BRIC markets. I do think there is going to be some profit taking in a number of emerging markets such as Mexico, Southeast Asia ,which are now starting to look very richly priced.
Q: We have seen some improving macros. The fall in gold and crude is obviously beneficial to a yawning Current Account Deficit (CAD) as well we have seen inflation fall more than even the most optimistic expectations. Are the macros improving? Is there a likelihood that you are going to see outperformance in India in the equity markets?
A: The answer to that is yes. Let us not forget YTD the Sensex 30 is down 4.26 percent. That contrasts with the Shanghai Composite down 3.3 percent. So India has been an underperformer this year. Clearly talking about emerging markets one categorization has to make is the distinction between commodity importers and commodity exporters.
If one looks at North Sea Brent the trading range over the coming months of perhaps USD 95 to just over USD 100 is likely. So, I do not see oil prices bouncing back. Having had this correction we stay at these levels. That lower commodity price environment is positive for India. One is absolutely correct to say that the inflation data is better than expected.
The Indian market, which was looking overvalued at the beginning of this year is now looking reasonably valued and particularly, compared with some of the Southeast Asian markets such as Indonesia, Philippines and Thailand.
So, as we go into mid-year a period of outperformance by India. Let us not forget that foreign capital flows over the last two to three months have come down quite sharply. As a result investors have moved from being overweight India to underweight India and that will give the market support.