EMs have priced in QE fear; India lure on: Eastspring

Ahead of the US Federal Reserve's meeting on late Wednesday evening; analysts maintain a cautious outlook on emerging markets (EMs). EMs may have priced in QE fears for the near-term, but they could correct more in the medium-term, says Nicholas Ferres of Eastspring Investments.

The Fed, in its meet, will just acknowledge positive US macro data, especially the unemployment data, before deciding on the next course of action, he told CNBC-TV18. Also read: Is India moving closer to a ratings downgrade? Speaking about the Indian market, he says that though the current valuations are slightly higher, they are still attractive. However, the rupee needs to stabilise for financials to look positive, Ferres adds. Below is the edited transcript of his interview to CNBC-TV18. Q: Have the emerging markets (EM) already priced in a Quantitative Easing (QE) tapering? Will it be a case of selling on rumour and buying on news once that finally comes through? A: In the very short-term, they have probably priced in a fair bit of the likely response from the Fed. But in the medium-term, the Fed is much closer to withdrawing its monetary accommodation and eventually sometime next year probably will be contemplating a normalisation in the cost of capital. The rise in US yields is a bit like a big black hole that will suck the value out of unsuspecting carry trades. In the medium-term, there could be a lot more to go in this price episode. Q: What would your immediate reading be? What do you expect to hear from the Fed tonight? What might be the immediate scenarios you are drawing up for dollar index or for EM performance? A: The Fed will probably acknowledge the general improvement in the macro news flow, but there will not be too much incremental difference from what they were saying last time. You need to keep an eye on the news flow in the US labour market, the US jobless claims. Jobless claims’ trend suggests that is consistent with further significant decline in US unemployment rate and that is really what the Fed is going to be focused on in addition to the general macro news flow in terms of growth. The US unemployment claims at the moment are probably consistent if you just did a statistical regression analysis with an unemployment rate of around 5.5 percent. Over the next couple of quarters, the Fed ought to be thinking about withdrawing its monetary stimulus and contemplating a rise in the cost of capital. Q: Last time you said that Indian markets were expensive trading at 14 times. They have since fallen a bit. The Nifty even touched a low of 5,304 and dollar-rupee has gone to 64. Given both these are you seeing for a dollar buyer the markets the markets looking any attractive now? A: It is certainly more attractive than what it was a couple of weeks ago. The rupee is starting to look interesting at these levels. At the time I was worried about a further depreciation in the rupee versus the dollar and a fair bit of that is probably being priced in. If you look at the way the price actions evolved, it has clearly become rapid and emotional and somewhere just around these levels at least thinking about rupee denominated bonds is probably more interesting. The valuation of the equity market could still come down a little bit further, but certainly if the currency stabilises in the short-term that maybe positive for financials.