EMs fundamentals weak; overweight on US, Japan: Finaport

Federal Reserve chairman Ben Bernanke said nothing new in his testimony on Wednesday, he just reiterated that rollback of stimulus would be data dependent, Hans Goetti, Chief Investment Officer, Finaport told CNBC-TV18 in an interview.

According to him, given the global economic slowdown, the fundamentals of most economies including emerging markets (EMs) are not favourable at this point. But postponement of QE tapering to end of this year, or start of 2014 would be slightly positive for EMs from money inflow perspective. Finaport is overweight on US and Japan, it has reduced exposure to Asia and emerging markets and remains neutral on Europe. Delay in tapering could help rupee and other EM currencies but the bias for them is towards the downside, he said. Also read: Macquarie lowers India's FY14 GDP growth forecast to 5.3%  Below is the verbatim transcript of his interview on CNBC-TV18 Q: How have you read the impact of what Bernanke said on emerging Asia. We seem to be getting the feeling that Asia is still belabouring under tapering fears? A: Bernanke did not say anything new. We knew from the beginning since tapering talk started in May that it will be dependent on the data that is coming in. Although one can always argue whether the glass is full or half empty but it is a fact that the US economy is growing at sub-2 percent pace despite stimulus that has happened; both fiscal and monetary, and we think there is a case to be made for tapering to happen later rather than sooner. We will see what happens there but that’s probably our base case right now. Q: How should Asia react? Should one expect that an adequate amount of selling has happened and since liquidity is not going to dry up at a very furious pace, are there spaces emerging to buy in emerging Asia both currencies, equities, bonds? A: We have had the sharp correction in equity markets especially emerging markets after tapering talk started in May. Of course a lot of bad news or the prospect of easing off, of expansionary policies is discounted. So, I would think that if tapering is postponed maybe towards the end of the year, maybe into 2014, it should be slightly positive for emerging markets. This is from a money flow perspective but the fact is the global economy, the emerging economies, everything is slowing down. So, the fundamentals are not exactly favourable at this point. Q: If quantitative easing (QE) is going to be data dependent, it is going to cause a lot of volatility? So, in this scenario how would you put your cash to use and where? A: The number one asset class is still in equities although even there we have reduced our exposure a little bit and put some of it into cash. We think the bond bull market is over, and all that we can hope for now in the bond space is a rally to sell into basically the last rally before interest rate start to go up in earnest. We also have an exposure to gold, which is completely out of favour but we still think a case can be made to be in hard assets. I think an exposure to gold is warranted. Q: Since you said you still have a very large exposure in equities; (a) where have you reduced your exposure if, and (b) you are still expecting divergence in performance in the developed market equities and emerging market equities to continue? A: Our positioning is this way; we are overweight in US and Japan. We like Japan as a combination of an economic recovery, easy monetary policy and some secular forces, which are at work there. We have reduced our exposure to Asia and emerging markets. Europe, we remain neutral. There is value in Europe, there are lots of stocks with very high dividend yields and which are fundamentally sound. In fact some of the companies are looking much better in the European economies do. However, our overweight in equities remains, although at this point of time we also have a little bit more cash than we usually do, just to capitalise on opportunities as they arise. Q: Would you want to take a guess on how the rupee might move hereon, do you think the onslaught is over or do you think it still has a weakening bias? A: The first onslaught for rupee is probably over. If we do have delayed tapering, it could help the rupee and some other emerging currencies but the trend will be towards weakening. For India, maybe they will have to hold up; probably will have to increase interest rates, at least scale back their easing and that is what is probably is needed. Therefore, the bias is on the downside for the currencies.