Stephane Deo, global head of Asset Allocation, UBS Investment Bank is cautious on the emerging markets and feels that the profitability of companies in emerging markets has been disappointing.
However he is bullish on India given its valuations. “The way to approach emerging markets is to be long short with emerging markets and for the time being India will be one of the countries we would like,” he says in an interview to CNBC-TV18.
Meanwhile, he added that the weakness in yen will not affect European market's growth to a great extent as the direct competition between them is limited.
Below is the verbatim transcript of Stephane Deo’s interview on CNBC-TV18
Q: The event of the Japanese yen or the dollar-yen going past the 100-101; will that have any repercussions for European growth as well since there must be a lot of competing products between Germany and Japan for instance?
A: We do not think there would be a big impact. Our stock analyst said that there are definitely a number of sectors, in Germany and France there are number of stocks that could be impacted in Scandinavia as well. But, the direct competition between Europe and Japan is limited. So, from a macro point of view, the impact would not be that big.
Q: How have you looked at the latest data coming in from the US? The jobs data was strong as was the jobless claims data. Other manufacturing and spending data haven’t been very positive. Do you think there is enough steam for the equity rally to continue?
A: Economic data has not been very supportive. The non-farm payroll data was quite good. But there are two things going on at the same time. Firstly, we have a confirmation of the recovery in the US. It is not too great recovery but it is a recovery. Secondly, the Federal Open Market Committee (FOMC) is now looking at keeping quantitative easing (QE) or even increasing QE. So you will still have the stimulus from the Fed for much longer than we had expected previously. A situation where you have an economic recovery, even a made one and the central banks still acting very strongly is positive for equities for the near future.
Q: There is a G7 meet today. Do you think there could be some amount of formidable decisions with regards to the central bank liquidity, something which the German Finance Minister had pointed out in terms of a caution going forward?
A: I don’t think there will be much on that. I don’t think liquidity is really the. If you look at the US, it looks like the transition mechanism is starting to work. You see some increase in lending. Europe and UK are still big problems, but I do not think it is a problem of liquidity or bank not being capitalised enough, not being profitable enough and not willing to lend. So I don’t think liquidity is the main issue for the time being for the world economy.
Q: For the past four months or more the favourite trade globally has been short commodities and long developed market equities. Is the short commodity trade over for now?
A: In the past one or two weeks, something interesting has been happening. The copper price has rallied, but not only that if you look at the EM stock markets, they have performed in the very recent past. Also, some of the cyclical names have performed reasonably well. So, the pattern of the rally is little by little changing.
If you look at outflow of funds, we have seen some buying of equity in the periphery of Europe which is something new. I think there is a change. You have to be very careful, because it is only the past few days or maybe one or two weeks that we are seeing that continue, but there is definitely a risk-on attitude of the market recently.
Q: If developed market equities have been followed by peripheral Europe assuming the trend continues, will you see emerging markets as the next candidate?
A: We are cautious on the emerging market on a structural basis because our research shows that the profit ability of companies in emerging markets has been disappointing. So, it is difficult for me to see a long period of performance of emerging markets compared to developed markets.
If we have more stimulus from the central bank, there is some potential for emerging markets to have some of the catch up. There has been very poor performance so far this year. So some correction is warranted but again that would be a short term correction. I do not think that emerging markets would offer performance on the medium term.
Q: How does UBS approach India within the emerging markets basket? What would your strategy and your call be?
A: We like India essentially based on valuation arguments. So when I say we don’t like emerging markets, that’s emerging markets as a bloc. The way to approach emerging markets is to be long short with emerging markets and for the time being India will be one of the countries we would like.