Expect emerging markets to correct further: UBS

Stephane Deo, head- European Economic Research, UBS believes the correction in emerging markets (EMs) is not a done deal. Speaking to CNBC-TV18, Deo says the markets are far too leveraged and with the Fed tapering its quantitative easing (QE3), the availability of credit for the EM countries will be reduced.

"A number of investors are telling now that EMs are cheap for historical comparison and I do agree that EM is cheap that there has been a good correction. I think our view is that it is cheap for good reasons. The fundamentals are still not supportive and so, it should go down further," adds Deo

Below is the edited transcript of Deo's interview to CNBC-TV18.

Q: What have you made of the recent kind of collapse that we have seen in some of the emerging markets like India and Indonesia and the kind of pressure that has happened on the currency front? Do you see some scope of recovery from these levels?

A: No, we don't think that the market has reacted enough yet. This has been a long-term trend for us. We have pushed the idea that there was too much leverage especially in South East Asia. We have seen a big deterioration, for instance, the current account in Indonesia, Malaysia and in Philippines as well and our economic team based in Asia has pushed the theme of dystopia. Hence, the increase of leverage has been excessive. So, I think what is happening now is that there is too much leverage and obviously with the Fed going into tapering, the availability for credit for this country will be reduced. So, I think one enters a phase of adjustment and the correction of the market is something that we had expected and we do not think the correction is finish yet.

Q: I don’t know how closely you look at the various emerging markets (EMs) itself, but is there a sense that some would have corrected more given the fall in both currencies and equities?

A: The fall in equity and currency is usually correlated. If you look at historically, typically the two variables are correlated. We had some very hefty fall. If one looks at South Africa for instance, the rand has lost more than quite of its value this year compared to the dollar. But again, there is the balance-of-payment (BoP) crisis and it looks like it is moving to that direction. One could have much more pronounced movement and the market should overreact. A number of investors are telling now that EMs are cheap for historical comparison and I do agree that EM is cheap that there has been a good correction. I think our view is that it is cheap for good reasons. The fundamentals are still not supportive and so, it should go down further.