Cautious on EMs; India still an underweight: HSBC

One needs to be cautiously optimistic on emerging market, says Herald Van Der Linde, Head of Equity Strategy, Asia-Pacific, HSBC because the issues concerning current account deficit (CAD), reforms etc have not yet gone away.

Recently, HSBC had downgraded India to an underweight and it sees no case to changing ratings on India.
Moreover, Linde expects a correction for Indian market at some point of time. Also read: Focus shifts to EMs again; stay long on India, says JPMorgan Sec Below is the verbatim transcript of his interview on CNBC-TV18 Q: The markets have thrown a huge surprise, thanks to Ben Bernanke, do you think emerging markets have more to go, especially markets like India?
A: We have to be little bit careful becoming too overly optimistic on it. Only two weeks ago, we were in the doldrums and there was talk about lack of reform and current account deficit (CAD), these issues have not really gone away. Although in the near-term, you might have a little bit of an overshoot, we are going to be little careful and take things into perspective; some of these issues haven’t gone away. So I think we are going to get a bit of a correction to the downside at some point of time. Q: You are cautious on the Indian markets, there is nothing to suggest that you would change downgrade rating on India right, you would still be underweight from the neutral rating that you had earlier on?
A: Basically what has happened is that India rallied back quite sharply, Indonesia as well after all the concerns on CAD that we had a couple of weeks ago. Those concerns have not abated, so we thought that was the time, within Asia context to take India to an underweight.
We have kept Indonesia for an-avoid for the moment because the underlying fundamentals are a little bit better there. But there the market has been rallying quite strongly as well.  I don’t see any reasons to change that particular rating structure at the moment. Q: Would you be a little more confident on the rupee at this juncture? What is the range you are looking at and what might be a December 31 level?
A: All these currencies will bounce back – So what you are going to see is equities move higher particularly in the emerging markets. The currencies will bounce back a bit but we don’t want these currencies to get this strong because what you need to have is some kind of adjustments in external positions. A weaker rupee in India allows for better exports and a reduction in imports and that is exactly what the adjustment process needs.
If we see a very strong rupee coming through and that will make all losses that we have over the last couple of weeks exacerbate or slow that adjustment process. That would not be very helpful.
So I would like to see the rupee strengthening a little bit, take some of the risks off, which has been priced into these currencies but that is about it and that is basically the same story for equities as well.