Bearish on rupee; more pain for EMs; like Korea: Eastspring

Despite Reserve Bank of India's (RBI) efforts to protect the free falling rupee, global investors continue to remain bearish on the rupee, says Nicholas Ferres of Eastspring Investments.

Strengthening of the dollar and positive US macro data will uplift global cyclical stocks and may impact emerging markets (EMs), he told CNBC-TV18. EMs, which have been highly expensive, may see more pain on the back of rising US bond yields. From ASEAN (Association of South East Asian Nations) countries, Ferres is betting on Taiwan and Korea. Also read: Wise to stay away from mkt now; hold Titan: Dipan Mehta Below is the edited transcript of his interview to CNBC-TV18. Q: What are your observations on the Indian currency’s depreciation? What kind of impact it is having on global investor sentiment towards the Indian market? A: Post the actions by the Reserve Bank of India (RBI), the currency initially consolidated, and now have moved from that sort of consolidation pattern. The dollar continued the uptrend versus the rupee. So it looks very bearish. Q: Generally, do you see EMs continuing their underperformance relative to the US market as has been the recent trend? A: In a general sense that is probably true. But, the macro news flow last night was actually quite positive for global cyclical stocks. The types of companies that are exposed to the global cycle will probably see some uplift. We are seeing some price action along those lines today. In contrast, the EMs that have been more orientated around domestic demand and have had pretty expensive valuations; they are probably much more vulnerable. So, when you have a rise in bond yields and you have the Institute of Supply Management (ISM) going upwards; it is pretty good for exports in this region and global profits. So it is encouraging from that perspective. Q: Some people might contend that the way the US bond yield has hardened again to 2.7 percent and the dollar index which has started moving up the last couple of days may not bode very well for flows into risk assets and EMs? A: That is true as well. If you are differentiating, if you have got a preference, look for cheap cyclical stocks. If US growth is recovering in a much more durable fashion and the global cycle is accelerating, then global cyclical stocks ought to do well. There are some expensive stocks and markets within EMs that are much more vulnerable. The markets that come top off mind are the Association of Southeast Asian Nations (ASEAN) markets and Mexico in Latin America. Q: In Asia which markets should do better in this kind of a scenario that you are just outlining? A: We like Korea given the cyclical exposure there. I suspect technology (stocks) would probably do pretty well in Taiwanese market. When you get an acceleration in the global cycle the ISM and orders intake tend to do pretty well. Q: Generally, what is your outlook for global equity performance as we wade deeper into the summer? Do you think we are done with most of the correction? The US market has gone back to an all-time high. In EMs do you think most of the correction is done or should we brace ourselves for another big leg down? A: I really have to differentiate between the different markets and sectors. Generally speaking, if there is a more sustained rise in US yields and the dollar, some parts of EM could be quite vulnerable, particularly as we get towards the end of the summer leading into September-October. So I think that is probably the timeframe where investors were to think about being more conservative. Q: Do you think most of the money which had to be pulled out of EM bond markets, the fixed income market, that has happened or do you see those kind of redemptions resuming? A: If US rates rise in a much more material fashion and based on the price action; if we look at the US 30 for example the long bonds. It initially broke out above 3.5 percent a couple of weeks ago. It has consolidated and came back down over the last week to around 3.5 percent and then has bounced off that last night quite strongly. So, it is quite possible that US long bond yields rise by another 75-100 basis points (bps) in the near-term and that would not very helpful for some of the bond markets in this region.