Indian mkt won't fall more than 5%, but prefer China: CIMB

Indian equities are unlikely to fall more than five percent from current levels, says Jason Todd, Asian Strategist, CIMB Securities. But, adds that other emerging markets are better placed than India in terms of currency movement, so he remains underweight on the latter.

Also Read: Rupee to hover in 61.25-61.75/$ range today: StanChart

“In local currency terms India is down roughly about 3.5-4 percent for the year. The outlook for a lot of the other markets which are not so influenced by weaker currency in potential capital flight risk is particularly stronger,” he told CNBC-TV18 in an interview. According to him, China and some of the Southeast Asian markets have better near-term outlook.
The free falling Indian currency which is adding to Indian equities pain, is showing some signs of stabilisation, he added.

Below is the verbatim transcript of Jason Todd's interview on CNBC-TV18

Q: You are underweight on the Indian market. Given the kind of growth and currency concerns that we have seen, how much lower do you think the Indian markets could head despite the underperformance until now?
A: I do not think from hereon there is a lot more downside risk to the market. In local currency terms, now it is down roughly around 3.5-4 percent for the year.
Maybe there is maximum 5 percent downside from here, but our underweight recommendation on India is more a function that the outlook for a lot of other markets that are not so influenced by weaker currency in potential capital flight risk is particularly stronger. When we think about that, China in particular has a better near-term outlook and for us potentially some of the Southeast Asian markets as well.

Q: What about the currency? It is one big reason that a lot of foreign investors found themselves in the negative this year. Are things stabilising now? Is it an undervalued currency?
A: Things are stabilising now. The currency reached new lows last week, but it seems that there is big commitment by the Reserve Bank of India (RBI) to try and put a floor under it. So from hereon in terms of peoples' decisions to invest within the market from an offshore perspective, clearly it is a hanging factor but the largest downside has already been put in place.

Q: If and when the tapering starts and there is a possible shrug of risk aversion across risk assets, will there be a huge outflow of foreign institutional investor (FII) equity funds out of India?
A: It is a clear risk, but we have to keep in perspective that portfolio positioning has changed quite significantly since we saw the first big wave of outflows from early May. It is a risk and you will continue to see a mild pressure on the currency and further capital flight risk. But in terms of the big volatility outflow that we saw earlier, I do not think you will see a repeat.
India to some extent is in the same boat as Indonesia in terms of currency risk, in terms of capital flight risk, but again both these countries, if we put them on a relative basis going forward from here are not likely to see the same extent of downside risk as what we have previously seen. Q: How should investors position in the markets now? Earlier you could rush to safe havens like pharmaceuticals and fast moving consumer goods (FMCG), but now there is a threat of even those sectors breaking down?
A: Sure. You still have to approach the market cautiously. We are still very cautious on the rate sensitive cyclicals and the growth plays, which to some extent indicate the financials and industrials despite the fact that you have already seen a reasonable correction within those stocks, within those sectors, but it is still too early to really position for a bottoming out and a cyclical uptrend.
We still stay quite defensive in IT and healthcare and some of the cement plays. You here have to put in perspective the view that there is a difference between thinking that we are going to see a lot more downside and thinking that the market is setting itself up for a lot of upside.
While you still have the overhanging risk of further downside to growth, you still have concerns about where the RBI goes here in terms of how successful it is in stemming the rupee's depreciation. You still have downside to earnings growth coming through and have seen that in the reporting round.
There are still a lot of overhangs that do not make us feel that you have to really rush in at the moment and take on a lot of risk in some of the stocks that have sold down. You stay reasonably defensive right now, but it is still a bit early to get into cyclical. Q: On Tuesday we saw some decent numbers coming in from Tata Steel and these material stocks were not in the fashion for sometime now. Would you like those stocks?
A: We are still relatively cautious on the medium-term outlook on Tata Steel, on JSW Steel, on some of the rate sensitive industrials that means Siemens and Bharat Heavy Electricals (BHEL).
We have to be careful in terms of thinking that a lot of material stocks and a lot of oversold cyclicals can hold onto the rallies that they have seen. It is not just in India, it is across the region over the last 1-2 weeks and has come off the back of what peoples' view is in terms of stabilisation in growth in China. Some of them are a little ahead of themselves relative to where the data is.
We are also likely to see some risk in terms of what the Fed will do over the next 1-2 months, in terms of tapering you might see a bit of an unwind in some of these domestic cyclicals and more global sensitive material stocks as well.