CLSA expects Indian mkts to decline next year

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The money apparently is going away from emerging markets to the US.  Russell Napier, Strategist, CLSA in an exclusive interview with CNBC-TV18 says, he sees more upside in the US markets.

Napier further said he was cautious on emerging markets asset prices. "The authorities in the EM will be watching like a hawk for asset prices inflation and trying to keep that in an orderly fashion. As equity investor, that's the real reason for caution rather than just inflation per se."

He is worried about a hike in crude price as this would affect the Indian economy. The Reserve Bank of India, he say, is likely to further tighten interest rates. He expects the Indian markets to decline next year. However, he says, any decline in Indian equities should be muted.

He prefers equities to commodities in developed markets.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh. Also watch the accompanying videos.

Q: When you were last in India, a couple of months back, you said that you expect a rally in US stocks, and now that is proved to be correct. The money apparently is going away from emerging markets to the US, how much more can this process last in terms of a rally in the S&P 500?

A: You are right to say that we are connected, there is no doubt about that. I still expect a significant rally in the US. When I last saw you, which I think was the end or middle of September, I was talking about a 30% rally for the S&P500. So, we have only done a half of that. There is more than that to come. It could conceivably get above that if we see a genuine inflation coming back and not just the realignment of those valuations. And that's what we were talking about then, it was that the equities were becoming cheap relative to bonds and a 30% realignment was coming based on that and more if this turned into a real economic recovery in America.

So, the question remains whether that's going to happen, but the realignment of equities and bonds is well underway. So, a 15-20% next year is potentially more willing in emerging markets (EMs) is through inflation. Mr Bernanke is creating not a lot more dollars because of the total amount of dollars are astounding, it's not actually growing. But through his exchange rate he is forcing everybody who follows the dollar to create more of their currency. And that's a problem for the EMs. And another great concern is as to how much inflation we will have in 2011.

Q: That is the real concern now about emerging markets like India that inflation could be this big problem in the first half of 2011 at any rate. The Reserve Bank has already sounded a note of concern on that, we have managed an 8.9% gross domestic product (GDP) growth for the past three consecutive quarters in India, how much do you think things can slow down in 2011?

A: I think the concerns are big enough for the Central Bank to do this. I think it's really important that we link asset price inflation and consumer price inflation by talking about the new targets for central bankers. It's easy just to talk about inflation because that's been the guiding star historically. But the world has changed very much since Alan Greenspan's day.

I think what we are going to find in EMs is that even if relatively there are low levels of inflation, you are going to find the authorities doing something. The thing that they are trying to do is to stop asset price, undue asset price appreciation. There were day's when the world's central bankers ignore that, they are now very concerned about bubbles on asset prices and subsequent bursts and impacts on financial systems. So, I wouldn't urge anybody to be cautious on EM asset prices per say. But I would probably mean something negative for economic growth. But I think it's important that we divide these things up and say economic growth will go on at a reasonable level. But the authorities in the EM will be watching like a hawk for asset prices inflation and trying to keep that in an orderly fashion. As equity investor, we are investing in assets, that's the real reason for caution rather than just inflation per se.

Q: It appears there is going to be a double whammy for emerging markets. First, ofcourse the shifting of capital to the US and then a domestic slowing down on account of monetary tightening, so how bad does it get for emerging markets like India?

A: Yes, I think there is more downside. The way you judge which country has the biggest downside is to look where the credit growth is the highest. It's in places of very high credit growth, the new form of central banking will manifest itself first. It is there that you will see authorities having to be particularly aggressive, even if inflation itself, consumer price inflation is relatively low. That's where they have to be taking action.

It has to be said that India is pursuing the right policy. It's a very different policy from the other EMs. It's a very brave policy as well because India more than anywhere else is leaving the exchange rates to find its own level which means that India has some of the flexibility to attack this by interest rates. I don't think we can say full flexibility because I think at a level of the exchange rate, India would be worried. So, in some ways the reflation in America is somewhat helpful for the authorities in EMs are welcoming, if it stops some of this hard capital pouring into India and others.

So, we shouldn't look at it as a double whammy, we should look at it as one single policy, this helps stops capital coming in. It would just alleviate just how much the authorities in EMs have to do to try and stop our next asset bubble. So, it's helpful for them. But this is not just the right time in a business cycle to be investing, at a time when the central banker and the authorities are not on your side, they are on the side of trying to stop undue asset price inflation and the reflation of America somewhat helps them.