Asia will continue to underperform developed peers: Citi

After falling for almost a week, the global markets started reacting positively on Monday on Cyprus' bailout. John Woods, MD & chief investment strategist, APAC, Citi Private Bank expects the US market to continue rallying higher in near-term.

When talking about the Asian markets, Woods expects underperformance by the Asian markets to continue. In case of Indian market, Woods feel that the political uncertainty is keeping the market in a low trading range. “There are some positives in recent pronouncements in the Budget 2013 from the government and therefore, we will have to see how flows perform,” he adds. Below is the verbatim transcript of John Woods’s interview on CNBC-TV18 Q: We have some good news globally and from the Eurozone. How much impetus do you think it could give global markets beyond the reaction we have seen today?
A: Certainly, the markets opened on a high note although investors seem to be selling into strength. Taking a step back and looking at the impact of Greece on the US markets, it would seem that Cyprus has been regarded as a side show which is not much surprising given its very low and minimal contribution to the Eurozone’s GDP. The market would seem to think that the underlying global growth story remains intact and as a consequence to that the markets can continue to rally higher. Q: How much would you give some of these Asian markets because the quantum of losses have been far sharper in markets over here, then in many developed markets or European markets?
A: The question involves two parts. Firstly, the actions in Cyprus are extraordinary. The fact that we have quite substantial levy tax on deposits could be interpreted as a confiscation of private world from the implications of that right across the Eurozone, particularly in the peripherals has yet to play out.

During this week, if we see a capital flight from Cyprus, the market will be focusing very closely on what is happening in banking deposits in the peripheral economies. Now that will have an impact on Asian markets. Asian markets have absolutely underperformed developed markets over the last six-eight weeks.
In case of Hang Seng, it is now back in negative territory. Lackluster growth constraints on property markets are impacting this particular country. All across Asia there has been broad based underperformance, particularly in North Asia, the more export dependent economy and I suspect that will continue. Q: In case of emerging markets like India, Brazil or Russia, are you seeing a lot of redemption pressures from either exchange traded funds (ETFs) that had money invested here or slightly longer term foreign institutional investors (FIIs) ?
A: In case of India, yes, there is still quite a lot of uncertainty over the political direction with regards to growth. There are some positives in recent pronouncements in the Budget from the government, so we will have to see how flows perform. However, in general there has been an underperformance by emerging markets versus developed markets. It is as much a function of earnings as it is a pretty stable growth story that we are seeing emerging from the US not least in the labour market and the housing sector. Q: Is that the trend people may have to live with over the medium term for equity markets where there are very disparate performances across markets? The US market at some levels has got to new highs while Asian markets have been suffering quite a bit. Do you think moves will remain disparate or will funds and optimism keep everyone afloat at some point?
A: This is a good question because you could argue that higher absolute growth levels in EMs and the effective quantitative easing (QE) among central banks should be positive for EM. However, a new paradigm is arguably in play where we are seeing the US dollar and the US equity strength and higher treasury term yields. When you put those three drivers together, it would appear to be alluring and compelling in terms of market capital flows.

We are seeing an unwinding of EM risk and that being directed back into developed markets focus on compounding dollar strength and a stronger equity market. Over the short-term and the medium term, this trend is going to have a very profound effect on EM markets.