Jul 09, 2013 07:03 PM IST | Source: CNBC-TV18

EMs cheaper than DMs; Fed to taper in Sept: Credit Suisse

Credit Suisse AMC's Robert Parker believes that emerging markets will have to wait till September to outperform, tough their downside risk has been reduced

Robert Parker of Credit Suisse AMC believes that emerging markets (EMs) like India and China are very cheap compared to developed markets now. Speaking to CNBC-TV18, Parker says while EMs may rally in line with global markets, one can be sure of their outperformance only during September or October when US Federal Reserve is expected rollback stimulus.

Meanwhile, minutes from the last US Federal Reserve policy meeting will be released on Wednesday. Parke believes since the US economy is recovering, it is inevitable for the Federal Reserve to begin tapering QE in September or October.

Below is the verbatim transcript of Robert Parker's  interview on CNBC-TV18

Q: We are seeing a clear distinction between emerging markets and developed markets in the last couple of days. Many experts point out that this decoupling could continue in the second half of the year, would you concur?

A: What we saw so far this year has been a clear underperformance of the Brazil, Russia, India and China (BRIC) markets versus the non-BRIC markets. Although a number of the non-BRIC markets that became overvalued back in April and May, have subsequently reversed.

If one looks at just Asia, there is a big divergence between markets like the Philippines, up 8 percent year-to-date (YTD) and in contrast China is down 13 percent YTD. So, there is a major divergence between the BRIC's and the non-BRIC's countries.

Apart from the decline in China, one of the worst performing markets this year, has been Brazil – down 26 percent YTD. Therefore, in terms of where we go from here, we clearly have a situation where emerging markets are cheap relative to developed markets.

Inevitably there is going to be a catch-up effect in emerging markets. Although China is very cheap just like India, we need evidence of stronger economic data which we may get only towards the end of September and October. So, if one is looking for an immediate rally in these markets, the downside risk is now low. They will rally inline with global markets but in terms of outperformance, we will have to wait till September or October.

Q: Primarily among BRIC's and even non-BRIC countries, are you detecting early signs of which markets look atleast a little more promising than the rest?

A: One has to look at where the growth is and where the corporate earnings is coming from. In the case of China, corporate earnings have been on a downtrend for atleast last six months to one year. We will get the second quarter gross domestic product (GDP) numbers next week.

Today, we had some slightly worrying inflation numbers indicating that over capacity is driving inflation down. China, although the market is super cheap, price earnings are now trading on less than 8 times, we have to wait until October for a rally there and likewise Brazil.

In case of India, I would want to see stronger economic data but one positive for India is the devaluation of the currency. The exporters with the current level of the rupee close to 60 must now be very competitive particularly in markets where demand is clearly picking up like America and Japan.

Q: On Wednesday, we have the minutes of the Fed meeting and also some comments from the Fed Reserve Chief Ben Bernanke on what the next step of the Fed might be. What is your view on when will we get to see tapering? Do you believe it could come in earlier than expected?

A: If one looks at every piece of US economic data, whether consumption, production, investment data the numbers are very consistent with an upturn in the economy and consistent with growth in the second half of the year of approximately 2.5 percent. With that recovery, quantitative easing (QE) at the current level of USD 85 billion a month is not justified. So, it is inevitable that they will start to reduce QE in September or October.

They will reduce it to USD 50 billion or less per month in Q4 and will then continue to taper it so that the QE programme is over by the end of the second quarter of 2014. It is going to be a very slow process. They are very sensitive to the fact that if they withdraw QE too quickly that would have a negative market effect as we saw at the end of May and that in turn could have a negative economic effect.

So, they are very sensitive in not removing QE too quickly.

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