US better placed; EMs to see selling pressure: BlackRidge

With the macroeconomic scene turning for the worse and the downside risk to growth going up, emerging markets will find themselves under pressure for a much longer period, cautions Arindam Ghosh, MD & CEO, Blackridge Capital Advisors.

"Investors in the US are much more confident now on the back of recovery on housing, balance sheets getting repaired, but the situation in India and other EMs is quite contrasting," he told CNBC in an interview.
According to him, the best scenario for India and other EMs would be to get clarity on quantitative easing and a definitive timeline, with that there may be some reprising of risk and improvement in risk appetite in the second half of the year. Also Read: Outcomes key to RBI rupee lock; ball in govt court: Experts
“Overall the allocation as far as India is concerned within the EM pack as well, as we get into the second half of the year probably is going to remain even more challenging," he added.
He feels India's problems like weak investment climate, rising short-term rates, extending working capital cycle and deterioration in asset quality etc. cannot be solved with a short term solution. “The collateral damage is going to get far extended into the next year as well. So the cycle could be much longer. The path to recovery is going to take a much longer while,” he elaborated. Below is the verbatim transcript of Arindam Ghosh’s interview on CNBC-TV18 Q: What is your sense of how to approach this market? There seems to be a lot of pessimism piling up again.
A: The macroeconomic situation has indeed turned for the worse. We all know that the downside risk to growth has gone up considerably and this is what is going to keep emerging markets (EM) under pressure for a much longer period of time. When you go out and talk to investors in the US the picture out there is quite different from what we see here. I think there is a fair amount of confidence which is back there among US investors.
The recovery that we have seen in housing with asset prices firming up and with individual balance sheets getting repaired, but when you come to this part of the world, the kind of despair and gloom that we see is indeed a sharp contrast. So I think from an India and EM point of view the best case would be if there is clarity on Quantitative Easing (QE) and there is a definitive timeline. We would all be awaiting what Fed is going to announce, but the best case would be if clarity emerges and with that probably we will see some repricing of risk and improvement in risk appetite in the second half of the year. Q: What do you expect to see from this market in earnings growth? Earnings growth has been so paltry, when you talk to a lot of your foreign investors are they even interested in a market that is eking out this kind of single-digit earnings growth and such low Gross Domestic Product (GDP) performance?
A: We have again gone back to a stage where discussion around India is not really happening. The kind of interest level that we get to see as far as Japan is concerned and also there is still a lot of hope around China clearly given the fact that they have much more firepower to address on both the fiscal as well as on the monetary side. India plagued with its problem around the way things have actually been grinding, the kind of investment climate that we have seen and the way the currency has been behaving it is not a good picture at all.
So the sense that we get is it is more of a top down approach. People do realise that there are pockets of the market which are extremely overheated and whilst they have been brave enough from a long-term point of view to maintain the position, overall the allocation as far as India is concerned within the EM pack as well, as we get into the second half of the year probably is going to remain even more challenging. Q: What does that mean for various asset classes? Do you see equities grinding lower, bond yields hardening from here and the rupee continuing to remain under stress as it has been?
A: We were all taken by surprise by the policy announcements yesterday and the stance of the central bank. What it means now is that there is more confusion as to what the stand is going to be, whether the rupee or the currency is going to be defended at a certain level or it is going to be allowed to drift naturally.
With the situation that we have on the Current Account Deficit (CAD), financing through inflows was always something which was fraught with extreme risk and I think there is no solution which has actually been articulated right now in terms of how that is going to be managed. So I think a ballooning CAD, fiscal deficit is also probably coming under pressure as we go closer to the election.
A combination of all these factors is going to keep the sentiments very low and typically when sentiments are low, investors are very shy of coming into the market and investing in various asset classes. One can argue that with the kind of capitulation that we have seen, particularly in the midcap space probably there is a lot of value which has right now come to the surface. So there can be a very strong case for bottom-up stock picking in these markets with a 1-2 year kind of a horizon.
The issue is that if the investment climate is so weak and we are in a situation where short-term rates have gone up, working capital cycle is getting extended and there is deterioration in asset quality etc. it is not a three month, six month kind of a solution. Obviously the collateral damage is going to get far extended into the next year as well. So the cycle could be much longer. The path to recovery is going to take a much longer while. Q: What kind of exposure did you guys have to sectors like Fast Moving Consumer Goods (FMCG) and are you looking to reduce that now?
A: That has been one sector where we have seen everybody trying to take cover. The valuations are extremely rich. I think in a situation where you have very limited options people have gone in for some of these strong names and companies, but I do not think over a longer period of time it is a sustainable valuation and therefore we expect that segment to come under pressure. It is not about sectors at this point in time, it is more about stock picking and how do you see value and probably take some contrarian bets over a longer period of time.