Jun 22, 2013, 02.28 PM IST
Industry experts see worse times for the Indian economy. They expect the Sensex and the Nifty to fall by another 15-20 percent and the rupee may touch 63-65/USD levels.
The global markets had a terrible week with the Dow Jones losing 5 percent, Nikkei 19 percent, Nifty, European markets and emerging markets (EMs) lost 10 percent. The currencies in the EMs like India witnessed a five percent fall.
Industry experts told CNBC-TV18, things are likely to get much worse ahead. Bhanu Baweja, of UBS expects the Sensex and the Nifty to fall another 15-20 percent from the current levels. He anticipates the rupee to touch new lows of 63 or 65/USD levels. Baweja also foresees a ratings downgrade for India given the macro economic meltdown.
Samiran Chakraborty, of Standard Chartered Bank expects India's gross domestic product (GDP) to feel more heat as the crash in the rupee could create a panic in the economy. One should not be surprised to see rupee touching 63/USD plus levels ahead, he added.
However, Richard Gibbs of Macquarie Securities believes that emerging markets will see a revival by November 2013.
Below is the edited transcript of their interview to CNBC-TV18.
Below is the edited transcript of their interview to CNBC-TV18.
Q: There has been a 10 percent evaporation of value across asset classes, bonds, commodities, EMs, developed markets. Is the hype created by liquidity over now? Will the markets now settle down? Will more selling happen across asset classes because probably our estimate of global growth itself has to be lowered?
Baweja: Over the last 10-12 years, there were two major forces in the global economy that underpinned every asset class. One of these was the secular decline in real interest rates in the US; the risk-free rate.
The second was the firm entrenchment of China in the global trade and manufacturing sectors. This, especially post China's privatisation of their property market.
Both these forces underpinned the dollar, the surge for yield, EM equities; every asset class that you can think of.
Both these forces are now at a very mature stage. In fact, US real interest rates are now turning up even before the Fed became hawkish. The 10-year rate in the US, the real rate in the US began to go up. Admittedly, we haven't seen that yet in EMs.
So there is at the margin a slight tightening of monetary conditions in the US. But we have not seen the growth improvement; certainly not in emerging markets. As these 10-year trends mature, a lot of the baggage is going to be compromised.
The bulk of this baggage is in the form of short dollar positions, in commodities that is financing the commodities, bonds and equity market trade in EMs.
The slowdown that we are seeing in EM today is not cyclical. It is a structural slowdown because the deleveraging in the developed world will continue for sometime.
EMs' growth model has effectively been broken because you are not able to export at 25 percent any more. That has been replaced by the domestic credit. That is fine as we managed to survive and keep growth going from positive 5 percent to negative 5 percent.
But, in the process, there has been weaker trade balances, current account balances. The currency has come under pressure. That is the weakest link in EM and is radiating further to other asset classes. Indian equities could be vulnerable from here.
Q: This week's fall was all round; without any discrimination between developed and emerging markets; stocks, bonds or commodities. After this funds will become more discerning. In that second round which asset classes will they favour? What will be the hierarchy of favoured assets?
Gibbs: We can probably see 3-5 percent more decline in overall valuations as asset markets come back to more credible and solidly based valuations. One reaches a point when the liquidations and the capitulation if you like and then those investment funds are then searching for investment and to be redeployed.
The issue for emerging markets is not that they won't be redeployed. They will be. But that will happen in the United States (US) where the growth potential looks like being more attractive and the yield potential from those stocks in particular also looks like being more attractive in the near term than what we are seeing in many emerging markets.
Q: How much fall are you expecting in emerging markets (EM) as an asset class? If discriminated between asset classes, and emerging markets, where will steep falls in equities and currencies be seen?
Baweja: The most vulnerable asset class is at this minute forex and equities. Not so much of Indian debt but EM debt is giving negative returns year-to-date. I would prefer debt over equity or forex even today.
EM has a strong balance sheet relative to the developed world. The debt trade in EM should do reasonably well because EM does have credit worthiness. However for the equities and forex trade to do well good income statements are needed.
EM has very ordinary income statements. Their earnings per share (EPS) growth is lower than EPS growth in the US despite EMs growing at a gross domestic product (GDP) level faster than the US. So, that is not translating the headline GDP growth into better EPS growth.
EMs are not as efficient in terms of their costs as the developed markets are. That is why they can underperform. So, in terms of asset allocation within emerging markets, debt is still a preferred asset class over equities. I certainly feel that way about India.
How much further can we fall from out here? Equities in EMs can certainly go another 10-15 percent more from here. It is not a question of after 15 percent they would be fairly valued.
A positive catalyst for emerging market equities to go up now is needed. Europe hasn't really begun to rebound it has stabilised. The US is indeed rebounding but you have not seen better import numbers in the US.
Q: When do you see EMs re-emerging as attractive asset classes? Will it be by the year end or will it be after another 5 percent of decline? Which of them are likely to look attractive?
Gibbs: We will see some attractiveness come back around November 2013 when a capitulation and redeployment initially into the US of those investment funds happens.
Investors will look for solid domestic demand and where growth would be seen in the corporate sector's earnings and expansion in domestic demand. That obviously places markets like India in very good stead.
India is principally a domestic demand-driven economy. The economies that would be lower down the spectrum will be those that are trade exposed which were production driven and trade oriented.
The reason for that are the reflation policies at work in the global economies such as Japan. That is putting on going pressure on exchange rates. Many of those trade exposed economies particularly in Asia but also in Latin America.
At the bottom of the spectrum now will be a lot of the Latin American economies as they are looking like growth will become less buoyant. There will be some financial issues to be addressed and that is going to raise the risk premium on those markets.
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