Jul 15, 2013 11:58 PM IST | Source: CNBC-TV18

See limited downside for Asian EMs: John Woods

John Woods of Citi Private Bank, sees limited downside for Asian emerging markets (EMs) and expects some sort of recovery from Q3 onwards. North Asian markets like Taiwan, Hong Kong, Singapore as a function of exports and uptick of growth in United States will see bottoming out first.

The markets overall are now focused on a gentler approach to repricing through tapering but earnings season could be the next big risk says John Woods, MD & Chief Investment Strategist, Citi Private Bank in an interview to CNBC-TV18.

However, he sees limited downside for Asian emerging markets (EMs) and expects some sort of recovery from Q3 onwards. North Asian markets like Taiwan, Hong Kong, Singapore as a function of exports and uptick of growth in United States will see bottoming out first.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: What have you made of all the newsflow surrounding the global markets? When are you expecting the Fed to taper its bond buying program after all the strong economic data that we have seen of late?

A: It has been a bit of a schizophrenic time for the market. We first interpreted the Fed's comments as clearly one of tightening rather that tapering and there is an important distinction there. So, obviously the markets repriced very dramatically, in order to get to that new equilibrium.

In the meantime, following some comments by the Fed we have now swung around to the point of tapering rather than tightening and as you see there is a bit of a relief rally going on.

In Asia we have a China overlay, but I think overall the markets are now focused a little more on the slightly softer, gentler approach to repricing through tapering, although earnings season is the next big risk.

Q: We were getting some emerging markets (EM) fund flow data and it is clearly indicating that the EM basket is in outflow mode – it has been about USD 2 billion or so, in the past fortnight. Do you think decoupling or deviation between the US markets and EMs will continue to accentuate, irrespective of the commentary on tapering?

A: It has been going on for two years, so it is not a short-term phenomenon. Markets, particularly in Asia started underperforming in the mid part of 2011. Coincidentally, that was precisely the point when exports to the United States and Earnings Per Share (EPS) started to tumble.

We are of the view now that there has been a very dramatic repricing over the last couple of years. We think that EPS on a relative basis will start outperforming the United States, particularly second and third quarter data.

So, we are a little more comfortable with the idea that the downside is limited and we might be able to start to see some sort of recovery, particularly in Asian EMs into the third quarter of this year.

Q: The data that we got out of the Indian market in the last couple of weeks is quite confusing. Wholesale Price Index (WPI) has softened, but Consumer Price Index (CPI) is still elevated. The exports have fallen, but the gold imports have fallen as well. There are pros and cons in the economic data that we have got, but purely based on the macros how much credence would you give some more upside to the Indian markets? How are you positioned on Indian equities as a whole?

A: Indian equities will continue to be buffeted by those equity inflows and outflows previously mentioned. There has been quite an extraordinary amount of inflows into Indian equities since 2009. It was close to USD 88 billion and we have seen very little of that leave, or at least we didn’t, until the last few weeks.

In my view, the equity market's ability to maintain these sorts of ranges will largely depend on whether or not foreign investors are willing to stay in that market. The currency overlay to all of this is a stronger dollar. If we continue to see the dollar strengthen obviously that tends to have a negative impact on local equity markets. Investors unwind their risk positions in order to repatriate to the stronger currency.

Q: In the second half you expect at least Asian EM to look positive. What is the pecking order?

A: We are more oriented towards North Asia and let me explain why. South Asia, including India has had the most extraordinary outperformance versus North Asia since 2010. It was a reflection of that part of the region's slightly more domestic oriented focus. They were a little more insulated and less exposed to the volatilities of global trade.

Conversely, North Asia, which in many ways as leverage particularly on US growth suffered dramatically. Going forward into the third quarter and fourth quarter of this year we expect to see an uptick in US growth and the North Asian EMs will best benefit from that are those markets most leveraged to the United States through exports. That would include markets like Taiwan, Hong Kong, Singapore and obviously China. It is those sorts of markets that we believe from a leveraged growth perspective will outperform.

South Asia and Southeast Asia I think will perform on a relative basis, but there will be a a pecking order, and I think the first to get pecked will be North Asia.

Q: We have had fairly pathetic industrial output data for May, which indicated contraction of the economy. Anecdotal data is also looking like a contraction for the next couple of months, up until July at least and we have had a CPI inflation which just refuses to climb down. What is your sense of how funds will behave towards India? Will you see outflows? Do you have a view of how the rupee might trend?

A: We need to see a base in growth and that is true not only of India, but it is actually true of all Asian countries. Once we get the sense that the deceleration in growth in India and indeed around Asia, has come to an end, then we can expect to see some positive growth momentum develop thereafter, that is precisely the signal investors will be looking for to take advantage.

Where we tend to see a little bit of growth momentum, we tend to see markets looking a little bit more positive, particularly as corporate earnings improve, particularly as EPS grows, I guess that will be the catalyst that we will be looking for in India and to be fair it is a similar story right across the region.

Just to return to my original point, I think where we will see the bottoming out first as a function of exports and growth to the United States will be North Asia before we get to the south.

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