Bearish on equities, Indian rupee: Societe Generale

Global growth expectations are not going in the right direction, says Benoit Anne, head of EM strategy, Societe Generale. "Equities are going to be a tough market to look at right now because we are very busy downgrading growth expectations."

He would continue to be tactically bearish on the Indian rupee. Below is the edited transcript of his interview on CNBC-TV18. Q: What are the markets clinging to by way of hope? We are seeing some green in the European markets, is that just a technical rebound after a rather bad week? A: I don’t really believe in those green lights that you are seeing right now. To me, the big focus to watch is this downgrading of growth in Asia. We saw the China numbers coming a bit soft. Ofcourse they were appreciating by an aggressive policy response on the part of the Chinese authorities. That sends a red light, not a green light. We saw South Korea authorities cut their growth forecast and surprise the markets with a rate cut yesterday. Those are highly significant and telling me that the global growth expectations are not going in the right direction. Q: What’s your sense with regards to emerging markets (EMs)? Through the year, we have done decently, but recently because of all the growth concerns we have begun underperforming. Do you think that’s going to be the trend for the rest of the year? What is your view with regard to India at this point? A: I see a theme emerging in a much clearer way right now. We are seeing more policy easing in the pipeline. Even Asian central banks are joining the party. We are going to see downward pressures in local yields together with weaker currencies across pretty much all emerging markets. The context of India is a bit different because the currency crisis already happened before and is mainly driven by domestic factors. So, we are starting from a different base in a way from INR. In other words, INR remains quite cheap from a historical perspective. So, even though I continue to be bearish near-term on INR, I would have to recognise that the corrosion risks are not substantial in terms of magnitude because we already are trading at 55. It is still very-very cheap. Q: Even cheap enough for you to make the stock markets attractive? A: Equities are going to be a tough market to look at right now because we are very busy downgrading growth expectations. That’s not an environment that is supportive of those EM equity markets. Q: I was referring in specific to India? Do you think the bad news is all priced in both by the currency and by the stock markets? We did see a minor rally. The question is really whether it has more legs or whether all this is just built on hope of some domestic policy changes and might recede, if those changes didn’t come. A: I would continue to be tactically bearish on the INR. So, I see a corrosion risk there. The rally we are seeing has no more legs. But ofcourse it’s going to be driven by the global environment also to a large extent. I am very nervous about the coming months with headline risks still very high. Q: What would money chase? What would investors chase? Would it be more of the dollar because a QE3 is atleast not on the horizon? Would it be these highly overpriced treasuries? What would money chase at all? A: It depends on what kind of investor you speak to. The long-term investors in emerging markets continue to be relatively bullish. Infact just published EM investors survey is precisely showing an improvement in sentiment over emerging markets from a couple of months ago. I felt that was quite interesting. The fixed income markets in emerging markets continue to be attractive precisely because you still have yields in emerging markets and you have bad data and combined with easing policies. So that’s a good environment to be exposed to EM fixed income markets.   Q: What is the next trigger to watch out for? A: The risks are numerous. I am on alert right now. There is a lot of sources of risk coming from Greece, Spanish Banks. It could be disappoint with the implementation phase of what the EU try to put together. The US picture is not great either. So, I think the list of global risk is quite long. Q: Would you see sell-off in commodities? We are getting every day a downgrading of GDP. Yesterday, Korea, today China, several days back India and India yet again perhaps after yesterday’s industrial data. Are commodities sufficiently pricing all this or is there more fall to come in crude or copper? A: I am not a commodity strategist. But my hunch is that after the rally we have seen over the past few days and weeks, yes, the risk is probably to the downside. Symbolically oil below USD 100 per barrel would have some interesting repercussions for a number of emerging markets.