If US yields rise above 3, it'll kill Indian mkt: Macquarie

The performance of our market has nothing to do with India’s fundamentals, says Viktor Shvets of Macquarie, adding, it’s more to do with bond yields in the US. "If bond yields were to fall lower, around 2.2-2.3 percent, carry trade may restart and funds flow may come back. On the other hand, a reversal back to above 3 will kill markets like Indonesia, India, Brazil, South Africa, and Turkey - anybody who is capital hungry," he says.

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Shvets told CNBC-TV18, US defaulting is a high volatility, low probability event. A far more important event is 10-year bonds falling because of the US economy not growing fast enough, he says. He expects tapering to start only in 2014 now. Below is the verbatim transcript of Viktor Shvets' interview on CNBC-TV18 Q: Is the market too complacent about the debt ceiling? We see treasuries rising, yields falling in the US.
A: I am not sure whether the market has been very complacent in the sense that I do not think anybody expects US to default. This is a very high volatility but very low probability event. I think far more important is 10-year bonds falling simply because the US economy is not growing as fast. Second, there is absolutely no inflation and third, now expectation of tapering has gone well into 2014.
So, there is no expectation of anything happening in October-November-December. So, we do have quite a number of months before we have any signs of tapering and hence bond yields are easing back. Q: Would that explain why you are seeing little bit of cheer in markets like India because tapering is pushed back so much? Exactly, how would the asset movement or fund flows play out? Is there more to come into emerging markets because of this postponement of tapering?
A: Absolutely and that is exactly what it is. The performance of Indian market has nothing to do with India and with the 10-year bond yield. If the bond yields were to fall lower, let's say 2.2-2.3 percent, we could see the carry trade restarting and the funds flow coming back. On the other hand, reversal back to above 3 will kill markets like Indonesia, India, Brazil, South Africa, and Turkey, anybody who is capital hungry. Q: Tactically how would you position yourself on India in the next three months in light of all these global developments?
A: We are right now playing Association of South East Asian Nations (ASEAN) and India because most of the problems are in ASEAN and India rather than in north East Asia. We position through an overweight in Thailand rather than India or Indonesia and the reason being that you probably are likely to get the same equity performance with much lower risk than either in India or Indonesia but if the bond yields continue easing back, India and Indonesia will outperform.
My view is that bonds probably will stabilise between 2.5 and 2.7 percent in which case the best is behind us for most vulnerable countries. You need to have bond yields going much lower. The other thing that could change the picture is the restructuring and transformation moves by the governments of those countries. At this stage - looking at India and Indonesia, I do not see any moves.