Selling to continue but downside to be limited: Citi

Following the US Federal Reserve's announcement to taper its asset purchase programme by the year-end, the rupee fell to an all-time low of 59.9350 on Wednesday.

John Woods of Citi Private Bank told CNBC-TV18 that the selling activity and correction in the market will continue for some time. However, the downside would be limited, he added.

He sees opportunities in Indian equity and currency markets in August-September. He added that the rupee depreciation would also be a good opportunity to invest into cyclical stocks in the near future.

He advised his investors to re-enter the North Asian market and expects range-bound trading in the US equity markets for the next six months.

Also read: How will India be affected by US Fed move to scale down QE?

Below is the edited transcript of his interview to CNBC-TV18.

Q: There have been some big falls in emerging market currencies and equities already. Do you see more selling in these markets?

A: There will be more selling but not considerably more. There has been a reset of emerging market risk in general in Asia over the last four to six weeks. That is on the back of reprised expectations over tapering.

The markets now have to come to terms with withdrawal of the liquidity flows for the last three to four years. So, some pretty crowded trades in defensives (stocks) in Asia, particularly in South East Asia have been seen. Now those are beginning to be unwound and this is causing quite a marked reprising in risk.

This has been going on for the last four to six weeks. We have seen substantial amount of correction already. I don’t expect a catastrophic correction going forward. Some further price declines in the illiquid summer months are expected. But the downside is somewhat limited.

Q: India's currency has fallen 9 percent in the past seven weeks. Does it turn attractive to a fund that is coming afresh? How much more of a fall in Indian currencies and equities are you expecting?

A: You are right. Over the last four to six weeks, India's currencies have come off perhaps more so than its neighbouring comparables. Some of the moves are also seen in the equity market.

India has enjoyed substantial equity inflows over the past three-four years. These are gradually being unwound now. However, a lot of the bad news is already in the price, particularly in the currency.

But by the end of August, heading into September, there will be some very attractive opportunities in Indian equity and currency markets. From a private bank perspective, and the recommendations we give to our clients, we would be looking very closely at this market.

Q: About the point on buying eventually returning into the market; when that happens, what sectors will you look at? So far, defensives and fast moving consumer goods (FMCG) have done well. Will you invest into cyclicals because of the rupee depreciation?

A: Yes. Interestingly, anytime, the market is faced with a really worrisome risk event. We saw a lurch to defensives, particularly in the safer, more protected markets of South East Asia. That is actually unwinding now.

We are seeing an equal even greater sell off in defensives in South East Asia. Perhaps, a more balanced approach among investors towards the cyclicals is seen too.

Upside in the cyclical sector will be seen as the global growth shows some more signs of sustainable traction.

_PAGEBREAK_

Q: Looking at all the data, one would assume that there is a bigger or incremental fall in emerging market equities to be expected. But eventually, which would be the most attractive for you to re-enter?

A: We are looking particularly at absolute and relative valuations for the equity market. We are looking at metrics such as books, price earnings (PE), forward looking, earnings per share (EPS) and our focus at the moment is very much on North Asia.

This has been the underperformer for the last two or three years. Some of the markets there now are looking so attractive and ridiculously cheap. We are now beginning to look at them much more closely.

For example, China trades at a 70 percent discount in terms of PE to the United States, which we have not seen for 10-15 years. So, it is those compelling valuations now, which are attracting us from a long-term (12-18 months) investment horizon.

Q: In the US yesterday, bonds and equities fell. But, in a bit when the immediate panic stops, money from bond markets will start going into US equities?

A: It is right. The taper news was a surprise. A very sharp correction this morning in Asia is a reflection of that and a pricing in of that. But going forward, ultimately the market will look at a couple of things.

It will look at momentum, earnings, underlying strength of the economy. Over the next few summer months a major bounce in risk assets will not be seen given the typical seasonal liquidity that characterises companies now.
 
We have had a fantastic run in equities, particularly in US. So over the next six months, we will probably see some range-bound trading activity.

Q: Where will the money go if emerging markets (EMs) have a bit more to fall and the US equities look well valued then where is money going?

A: EMs will see some volatility over the next couple of months, into the tail end of the Q3 and Q4. We actually see a lot more positive price action in EMs in general and North Asia in particular. It has leveraged to the US growth cycle.

So, if we see further signs of stability as indeed the Fed forecasts, further signs of traction and growth in that economy, then we would expect to see our markets here responding positively and accordingly.