India not in financial crisis yet: Mark Matthews

Mark Matthews, Bank Julius Baer & Co believes that Fed tapering is the reason for slide in emerging markets (EMs). According to him the Fed tapering will happen in September and EMs have already priced in QE tapering of USD 10 billion.

Indian equities have taking a sharp beating in past few sessions on the back of weakening rupee, which breached 64/USD on Tuesday and hit a new low. Despite the pessimism, Matthews feels that that India is not in a financial crisis yet. Matthews told CNBC-TV18 that it is just not a good year for EMs. They have clearly lost their sheen and will continue to underperform, he said. Also read: No major selling seen by FIIs so far; FMCG at risk: HSBC Below is the verbatim transcript of his interview to CNBC-TV18 Q: What is it looking like from the US because every week there is lot of toing and froing and speculation about whether the tapper starts in September or not. Do you think it is a big event for emerging markets? A: It is the reason why the emerging markets are going down. I also think that it will happen in September about USD 10 billion and when it happens, markets will probably breathe a sign of relief. It has been priced in, in many cases it has been overly priced in. So we are in the eye of the storm now but imagine a month from now the picture will be lot better. Q: Are you optimistic on emerging markets or do you think it will continue to underperform as it has for the better part of this year? A: I think it is just not a good year for them and it does not mean a disastrous financial crisis type year which is what has been priced into places like India. I saw front page of ‘The Guardian’, one of the big news papers in Britain on Monday which carried the headline ‘India on the brink of its own financial crisis’. However, I don't think there is a financial crisis there. So, at some places it has been over priced but generally the thing is that the most risk free asset in the world rightly or wrongly is considered the US Treasury Bill. If that yield is rising then what is considered very risky investing, which is emerging market (EM) equities, they are the first on the other side of the spectrum to see money come out of them. That has been the trend really that has been happening since around December and January. I kind of think that when we actually do get the tapering started off next month, it will be fully recognized. However, right now we are still in the midst of this volatility. Q: Do you see the possibility of any of the old global tail risks coming back in play in the second half of this year because the only risk emerging markets these days talks about is the prospect of liquidity drying up from the US, not Europe, not any accident and that has been the case for the last six months? So you fear that at some point some of those risks might raise their ugly head? A: Actually no I don't. I am not sure which risk you are referring to but may be you are talking about the US going into recession again and no I don't see that. European crisis, also don't see it. Europe is coming out of its recession, China is the one that keeps bubbling away as a crisis that hasn’t happened, but I don't think it will any time soon. Controlled economy what has really been going on there we don't know but I doubt they will ever show us a GDP print below 7 percent. So, adding all that up I actually think the global backdrop is pretty positive. The only thing is as these crisis fade away in Europe and US the central banks need to take back all the liquidity they provided. That is the volatility that we are experiencing in the emerging markets right now as we adjust to that. However, the overall backdrop is okay in my opinion. Q: Do you think EMs have lost their sheen as an asset class in the eyes of lot of global investors and that may not be such a temporary phenomenon to revert from after nearly five years of underperformance relative to the US? Do you think people would be looking at opportunities to pare down their EM weightage? A: It is really tough to know the answer to that. Some people own emerging markets and they are going to sell them, other people don't own them and they want to buy them so hard to know. However, yes they surely have lost their sheen that is obvious; they have been underperforming developed markets since around December-January. I think they will continue to underperform the developed markets broadly speaking the BRICS versus the US, Japan, Europe. Simple reason for that is even though the growth rate in absolute terms is much higher in the BRICS; fact is that the momentum of growth is much faster, much stronger in US, Japan and Europe. So doesn’t mean you write off the emerging markets. I think in some situations particularly India this is way beyond, clearly oversold. I also think that it is in situations like this where you do get India actually doing things. So, looking back cannot tell you exactly when but I don't think it will be next month, may be a few months from now India will look a lot better than where it is today.