EMs factored in QE fears; rupee stability needed: Finaport

The market continued its freefall from last week as the Nifty falling below 5,400 levels on Monday. However, global analysts believe that Indian market might have already factored in much of the quantitative easing (QE) fears. The rupee depreciation is really the worry for the India now, says Hans Goetti, CIO of Finaport.

Speaking on emerging markets’ (EMs) performance he does not see them perform very badly going forward. In fact, they may be priced at attractive levels after hitting the rock bottom, he told CNBC-TV18. Meanwhile he sees rupee fall as the major issue for the Indian market. Stability is needed on that area, he adds. Also read: RBI must stop defending rupee, cut rates for growth: Ambit Below is the edited transcript of his interview to CNBC-TV18. Q: Indian stock and currency markets have been underperforming for the fourth consecutive day. What is the sense you are getting as a long-term viewer? Will, at some point of time, long only funds may throw in the towel too? A: I would not say throw in the towel. You have to see this in the context of the whole emerging market (EM) universe. It started really when the tapering talk by Bernanke came out. The fear is that once Quantitative Easing (QE) ends, capital will flow in the opposite direction. That is exactly what we are seeing right now. The weakness in the rupee has prompted a sea change by the authorities. They are now much more in mode to protect the currency rather than support the economy. That is the concern specifically to India, but for EMs in general I would think that central bank policy still matters very much. Q: How much of a QE tapering has been priced in by the Indian market? In September, even if they start to taper, some would argue that the 10 percent fall recently; a large part of that may have been factored in. Your comments. A: A large part has been factored in. The fact that Bernanke talked about tapering in May and then made a U-turn two months later, tells that it was a trial balloon to tell the markets that this is not a one-way street. They tried to take the complacency out of the market and they have done that successfully. A large part is discounted. Is the tapering going to happen in September or December is the question. The US has a slight improvement in the economy. Having said that, we are nowhere near escape velocity, but at least at the margin, some improvement is seen. It is possible that tapering actually starts in September which probably will lead to another selloff. Q: How do you look at the scenario once tapering starts? Which markets would you worry about? What lows can the Nifty fall to? A: The context of EMs in India is certainly at risk as well. We have had an outperformance by the US market over the past two years over EMs. Now EMs are so attractively priced that at some point they are going to find a bottom and maybe have a correction in US. I am not terribly negative on EMs. India specifically, the big worry is the currency. But in nominal terms, the equity market may not be doing that bad. It is more the currency we are worried about. _PAGEBREAK_ Q: In India, some of the big stocks are down 50-60 percent in dollar terms. At some point, maybe some fresh buying would emerge in some stocks; especially from the long only funds. Is that something that you are referring to? A: That will be the contrarian call. You could almost describe the selloff in EMs as overdone and at some point; we are going to find a level. The problem again in India is the currency is like catching a falling knife right now. You do not know whether it is going to 63-65 or something like that. We would like to see a stabilisation there first. Q: Would you really worry that there would be an exodus of long only funds at all? At the moment, valuations do not indicate FIIs would do that even when tapering starts. We have actually got USD 12 billion flowing into India from FII funds this year. Is the danger of that slipping out when tapering starts little less because valuations are too compelling? A: We are talking about things that are known. Tapering is known and whether it is happening in September or December, it is going to happen at some point. What investors are looking at are the elections next year in India, which is something that we really should keep an eye on. That could be an outcome which is actually quite investor friendly, but that remains to be seen. So the worst of the selloff is over. The big question going to be is where the currency is going? Q: A big gap in India’s economic policy has been the inability of the Indian government to right price the fuel products. There is a cry from several investors that perhaps if diesel prices are raised seminally and the fiscal deficit is cut in one fell swoop, there could be a restoration of both fiscal and current account deficit (CAD). That much less crude would be imported. Would a policy move in the right direction make a difference with Foreign Institutional Investors (FII)? Would they see that as a big policy correction to come that? A: I will think so. They are looking at the progress on the policy front in every respect. We like to see is also the resumption of an investment cycle; again that has to do more with political environment than anything else. There could be positive surprises coming out of somewhere, which we cannot see right now; but it could happen out of left field and then you want to be in there.