Underweight on India; USD rally key for EMs: CIMB

Shane Lee, director-economist - Equity Research, CIMB remains underweight on India despite the emergence of near-time positives following US Federal Reserve's postponement of its tapering programme. Lee says the Fed will address its asset purchasing programme at a later date and that is likely to affect emerging market economies, particularly India and Indonesia which are reeling under high current account deficit (CAD).

But his pessimism is for the short-term. He is quite bullish on the American economy. Lee is also keen to see a rally in dollar which will help Japan and Europe push growth "and then ultimately you get a pick up in the emerging part of the world as well."

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However, he believes the emerging markets may see some ‘tactical’ rally in the short-term driven by the defensives. Below is the verbatim transcript of Shane Lee's interview on CNBC-TV18 Q: We have seen a significant appreciation in the Indian equity markets in the last 2-3 weeks. Do you think that could be short-lived now?
A: I think it could be. A lot of what we are saying at the moment comes around to the Fed and how Fed plays the US data over the next few months. We are still very positive on the US economy and we think that ultimately the Fed will address its asset purchasing program. So for us it is more of an issue of when rather than if and this is going to have implications for the emerging markets, so we are positive on the US.
We think the US continues to rally, but the important thing is that you are getting an adjustment in the US dollar, so even though the data is quite strong at the moment it is important that you get a rally in the US dollar. It enables some of the G3, including Europe and Japan to start growing stronger and then ultimately you get a pick up in the emerging part of the world as well. So for the short-term, we are still concerned about how markets are prepared for the US tapering, its asset purchasing program, but longer term we are very positive on the global outlook. Q: Do you think it can still give some legs to the tactical rally in emerging markets? If the Fed's dovishness continues up until December, do you think this tactical rally has more legs in a market like India?
A: Yes, I totally agree. The market can continue to rally although it is a bit of a timing issue around getting in and out of a lot of these trades. Ultimately, the cyclicals will win out, in particular say materials, technology that are all linked to the US economy, those sectors will continue to rally. But in the short-term, some of the defensives will drive the market going forward. So while we will have a fair bit of volatility we think that in the short to medium-term the defensives will still remain fairly well bid. Q: What is the order of caution in the emerging markets itself? If we see the pullout of tapering in the October policy itself, which emerging markets would be most impacted?
A: I think you have actually already seen that. We had Indonesia and India, so particularly the economies that have twin deficits, both the budget and current account deficit (CAD), those economies will be under pressure as the Fed starts to go about the process of withdrawing stimulus. Those two markets have been quite volatile post the Fed as well. So these are the two key markets that we are looking at, but in other parts of the world, we are probably a bit more sanguine about places like Malaysia and Thailand. We think that ultimately the currency sort of adjusts and that helps growth and then if the G3 look better then you get those economies participating in more cyclical recovery.