Limp QE may revive EMs, rupee in 9 months: Credit Suisse

Global market analysts feel that correction in Indian and other emerging markets (EMs) may continue when the tapering starts in September and October 2013. There may be a rise in US bond yields to almost three percent, experts say.

However, Robert Parker of Credit Suisse AMC also believes that this (tapering) process will be slow and the US central bank will still be buying bonds of USD 60 million after the tapering process. This may make the weak rupee look attractive for foreign investors, he told CNBC-TV18. He also sees Indian equities performing better in 6-9 months from now. Also read: 2013 is not 1991; but it feels much worse and matters more Below is the edited transcript of his interview to CNBC-TV18. Q: What is your call on emerging markets (EMs) including India. Are they pricing in quantitative easing (QE) tapering already or will there be fresh wave of selling once the tapering actually starts? A: Investors were very long in the United States (US) and Japanese equity markets. They were long on corporate bonds. Global investment positions have been particularly underweight or out of EM equities. While this correction in global equity markets probably continues into September and potentially into October as well, it is going to be a correction driven by what is happening in the US treasury market. Given the sharp falls we have seen in global emerging equity markets there is still downside, which includes India as well. But the downside is limited as most global investors have already exited those markets. Q: The manner in which both the currency and share prices have fallen might become unattractive to sell you think? So do you think even after the tapering is announced and it kicks off, maybe it would be too unattractive to sell? A: Probably. In emerging currencies and most notably the Indian rupee, a significant move has been seen. Six months ago it was appropriately valued. It has now moved into a much oversold territory. It doesn’t mean we might become even more oversold. I don’t see any short-term bounce in the rupee; some further short-term downside may be seen. For foreign investors, one is now looking at a range of Asian currencies including the Indian rupee, which are undervalued and are at levels which are starting to become attractive. A lot of analysts missed the point on tapering. It is inevitable that tapering is going to happen. There is a high probability given the strength of US data it is going to start in September and October. The speed with which Fed reduces QE is important. They will do it very slowly. So whereas QE at the moment is USD 85 billion per month, the average for Q4 is probably going to be a reduction to USD 60 billion a month. There are a lot of analysts who actually missed the point that the speed of tapering is going to be very slow. _PAGEBREAK_ Q: Purely in terms of equity markets, the call was that in second half, EMs will reverse the underperformance with regard to US markets? Or do you think the underperformance will still continue? A: In absolute terms, it is a high probability that during September and October that we will see 10 year US treasury yields move up to probably over three percent. The selling pressure there continues, which in turn will pressurise global equity markets. It will also push bond yields in most markets up further. The 10 year Indian government paper above 9 percent; probably the yields will stay well above 9 percent in the near-term. Developed equity markets and emerging equity markets probably will see this correction continue into September and October. It is still a correction. I am still positive on equities taking a 6-9 months view. Correction will not represent a buying opportunity for a November-December rally. I have a high degree of confidence we will have that rally. The undervalued markets then will underperform. EMs including India and some European markets notably some of the Southern European markets will also underperform.