SENSEX NIFTY
Aug 29, 2013, 04.14 PM IST | Source: CNBC-TV18

Long-term bullish on EMs; volatility to continue: SocGen

Despite the recent fall seen in the EM currencies on the back of Fed tapering its bond buying program, Patrick Legland, global head of research, Societe Generale continues to be positive on them in the long-term.

Emerging markets will continue to be volatile for atleast the next two quarters, believes Patrick Legland, global head of research, Societe Generale.

Despite the recent fall seen in the EM currencies on the back of Fed tapering its bond buying program, Leyland continues to be positive on them in the long-term.

Also read: Syria clash may seep in Iraq; Brent at $125 likely: SocGen

Additionally, Leyland says the conflict situation brewing in Syria is unlikely to last as US president Obama is very keen to not risk the country’s economic recovery.

Below is the edited transcript of Legland’s interview to CNBC-TV18.

Q: What is your sense about the tapering itself which always brings back the red on the screen. Do you think that if the Syrian problem were indeed to conflagrate into a military aggression which looks imminent tapering itself would be affected the time table?

A: The current Syrian crisis is virtually unlikely to last because Obama is very keen to be sure that the US economic recovery is not at risk on one side.

On the other side, there is a risk that we would have certainly a Syrian intervention, but we would be more looking for some relatively short than long lasting deteriorating situation.

If we take this into account it means that we are certainly in buying opportunities currently taking into account that on one side the US economy is confirming that it is on the aim of a very good recovery. On the other side we have had during the summer very good figures in Europe.

The main question mark, the main risk or the biggest fear is emerging market and on VIX side certainly there is still some volatility to come.

Q: If you go by past aggressions, they could last for couple of weeks once they start and the impact on the crude market continues for perhaps a couple of weeks more. Do you think that exists? If you were to see crude between USD 115 and USD 120 for say the next couple of months will that be reason enough or even if it is still the Federal Open Market Committee (FOMC) meets in the third week of September, will that be bad enough for the Fed to do a rethink?

A: The Syrian situation on one side is not going to resolve in a day. It is likely to last may be a few weeks. It might certainly push the Fed to review its position but tapering is on the cards, it is a matter of time. We have to discount this and take this into account in our market scenario.

However on the other side we have positive economic figures in the US and the beginning of positive figures in Europe. Even if we have Syrian crisis, even if we had crude at higher level we have series of paths as the sensitivity of economy to crude crisis is relatively limited.

On the other side we have weaker emerging markets. At this stage we don’t expect a major crisis in emerging markets but it is certainly something to watch. However, overall we keep a positive stance on the market.

Q: You have seen what has happened to emerging market currencies. When do you think it will possibly bottom out and what would be the next trigger for emerging market currencies, would it be now geopolitical as opposed to the Fed tapering timeline?

A: Unfortunately, we don’t expect emerging market crisis to be resolved in the next few weeks because on one side investors are expecting structural reforms and we are seeing beginning of finance reforms in Brazil or in India but it would be certainly not enough.

On the other side there is certainly further risk of volatility both on the currency and interest rates as well taking into account that investors continue to move their assets from emerging markets to developed market and particularly to Europe.

Q: How long do you think this aversion from emerging markets (EM) might continue? Is it going to continue for a pretty long period? As we see next year as well the cost of capital will go up. Maybe this year we will see a flight of capital, next year we are going to see less capital because there will be less dollar printing and the yields are definitely going to rise as the Fed has indicated sometime later on in 2014 they will start increasing rates. So do you think that we are going to see an extended bear market in EMs?

A: I would not say extended bear market. It depends on what time horizon one has. EMs are likely to be in bear territories for one or two quarters of the next year. Investors are likely to benefit from better economic figures on one side and maybe to uptrend in interest rates. On the other side EMs continue to have very good long-term prospects, but investors will wait for better buying opportunity, that is what we are seeing right now on our screens.

Q: Why are you in India? Is it that you think rupee is fairly attractive and stocks are attractive or you do not think so?

A: We are in India because we have a great resource team in Bangalore of almost 50 people who are doing very well and I am here to work with them because they are really making a success. As far as we are concerned, India is certainly a very good investment over long-term, but short-term so longer elections will not have happened it is likely the market remains volatile. Frankly as we have seen in the past it is not a unique situation. Every time we have election particularly in EMs, we see volatility both on the currency and on the equity market and this is exactly what is happening now in India.

Q: What is your view on gold? Is it back to a bull market?

A: Not exactly. Gold is clearly playing its role of being a safe haven when there is a crisis. Gold right now is the right answer to the Syrian crisis, but then we would expect gold to continue to decline. It is not anymore rewarded by negative interest rates. We have recommended our investors to use these constraints into gold as a fantastic selling opportunity.

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