See volatility in EM bonds, currencies ahead: Macquarie

There are many issues that can and will cause major tremors in emerging market bonds and currencies over the next three-six months, says Viktor Shvets of Macquarie. Though the depreciating dollar will be good for emerging markets in the short term, but in the long term, US dollar will appreciate and volatility in these assets will return, he told CNBC-TV18 in an interview.

Also Read: If US yields rise above 3, it'll kill Indian mkt: Macquarie According to him, there is a long-term volatility associated with the functional politics in the US. Below is the verbatim transcript of Viktor Shvets' interview on CNBC-TV18 Q: When we last spoke to you, you were confident that despite the market showing some volatility in the run-up to October 17 you expect both these to be relatively less important. You still hold that view that in the long run this is just going to be short-term volatility? A: Yes I do. There is a long-term volatility associated with this functional politics in the US but that is not anything new. At the end of the day US will have to address whether it is the infrastructure problems, education problems, whether it is political issues but I don't believe that either the budget or the default are likely probabilities. In essence it is a low probability high volatility event that is how we are looking at it. Q: But nevertheless these US or international events tend to have a big impact on currencies especially if US yields start going up and we now understand that in the latest auction the short-term yields shot up rather sharply. So if we were to see yields going up sharply in the run-up to the debt ceiling, do you think we could see a tremor in emerging market currencies? A: Of course we will and I think last time we spoke I said that within the next three-six months no matter what happens regarding the US budget, regarding any other issue, there is a very high probability that the major tremor will come again into emerging markets. It doesn’t have to be related to budget negotiation, it doesn’t have to be related to any potential debt ceilings or default. There are many other issues which are bound to cause volatility in bond and currency markets to increase again over the next three-six months. Q: So what would you stay with now in terms of asset classes? A: So long as the US bond yields don't shoot up dramatically which I don't believe that is likely to be the case, they peaked at around 3 percent, they are now about 2.6 percent. We think they will probably stay for a while at 2.4-2.7 percent that is not a bad outcome for emerging markets. Also depreciating US dollar is actually not a bad outcome at all for emerging markets because that is quite inflationary rather than deflationary. All I am saying is that will not last. Whether it will last three-four months or six months I don't know but it is not going to last over the longer term. Over the longer term US dollar will be appreciating and over the longer term volatility in bond and currency markets will return. But for the time being it is actually quite a good outcome for emerging markets and that is why they are performing.