Emerging markets could see another 8-10 percent downside and underperformance in China, India and Hong Kong is likely to continue, cautions Mohammed Apabhai, Asia Pacific Trading Strategies Group, Citi.
Large outflows from emerging markets are going into the developed economies, which would lead to further downside, he said in an interview to CNBC-TV18.
Meanwhile, Apabhai is concerned about macro deceleration in India. “Things like growth outlook, fiscal deficit, trade deficit and inflation and earnings situation continue to remain concerns. It does not seem like the outlook for Indian earnings is going to be as good as some of the other markets," he elaboarted.
Overall, Citi is not so upbeat on India and rest of the Asian markets ex-Japan.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Do you see the possibility of a further breakdown in Asian markets and specifically India, from here?
A: My view on the market has not changed much. There is an ongoing correction and a couple of other things happening. First of all, the period of risk-off that we thought was going to happen on a global basis, has still not happened but we are still waiting for it.
We have been wrong-footed on that in some of the developed markets. In case of developing markets, the provision of additional liquidity which is benefitting the developed markets is happening and is causing the emerging markets (EMs) to be sold off. We are continuing to see outflows out of EMs going into developed markets. We are seeing large flows going out of Asia ex-Japan going into Japan and out of all of those, India is a part of it with foreign investor selling just picking up.
Q: Due to various developments like the yen carry trade, liquidity may still remain quite abundant and in that context we may not get hit that hard, but you disagree with that observation. Do you think there are far sharper outflows coming for this market?
A: Yes. The money that we have seen moving since the Bank of Japan (BoJ) meeting has predominantly gone into the bond market rather than into equity markets. So, bond yields are coming lower. In terms of equity markets, there is a very strong correlation between the amount of liquidity that the domestic central bank can offer given the domestic inflationary expectations and the performance of the equity market.
If you look at Japan where the domestic central bank is providing a lot of liquidity, same thing is happening in the US, those two markets are outperforming. Markets like China, Hong Kong, India and Korea where the domestic central bank is a lot more reticent about providing that liquidity are suffering and we do not think this is going to change anytime soon. There is an emphasis from these investors into the market right now to be buying quality names with a focus on liquidity. This is because if I get it wrong, they can get out of the markets very quickly. Again, the markets where this situation is possible is Japan and the US rather than India or China.
Q: Given the potentially critical technical levels emerging market exchange-traded funds (ETF) are trading at, there could be a potential for liquidation. Do you mean we could embark on another leg of this downside after pausing here for a bit?
A: That is possible. Last time I was looking for a 10 percent downside, 10 percent higher than where we are right now. But we are still looking for another move lower of around 8 percent. The overall central bank liquidity is being reflected quite accurately in some of these EMs. We are still concerned about the outlook. For India in particular, we remained concerned about the overall macro picture. Things like growth outlook, fiscal deficit, trade deficit and inflation as well as the earnings situation continue to cause worry. It does not seem like the outlook for Indian earnings is going to be as good as some of the other markets.
Q: Does India right now look like a market in a bear phase or is it just a patch of weakness due to liquidity issues after which the market may well go back to being a performer?
A: It will eventually go back to being a performer. In long-term, we are in a secular upward trend provided that the liquidity remains. The problem is, when there is a huge amount of liquidity being pumped into the markets and there is an attempt at reflating the developed markets that are driving the global economy then the markets that have inflation already, will face even higher inflation. This will force the domestic central bank into a fairly tight corner in terms of their ability to loosen policy.
For time being, the outlook for India as well as rest of Asia ex-Japan does not look very good. Even in some of the developed markets like Japan and the US, it looks extended. If they too start correcting, we do not think there is going to be a DM to EM reversion trade, both DM and EM will selloff even more.
Q: Is currency also worrying people on the margin, given India’s large current account deficit (CAD). In addition to the earnings and the macro picture, is currency also responsible for leading to India’s recent underperformance?
A: The currency is fairly stable. People who are playing this trade are doing it more through the equity markets than through the currency market. Since the BoJ meeting, emerging market Asian bonds have stabled to higher. Currencies are appreciating, for example the Thai baht is now at the highest level since 1997. There has been weakness in the equity market.
If you want to be bearish on the Indian rupee, it costs you a lot of money because the carry is around 7 percent. At the moment, we do not think that people are looking at the currency as the best way to play this. If the currency starts moving significantly, then the macro environment is not going to be supportive. The currency should start to move lower before people potentially get involved. In the short-term, it seems like the most vulnerable is going to be the equity markets rather than bonds.