Cautious on EMs; Europe peripherals look attractive: SocGen

The US economy is now showing signs of solid recovery, but there are still some states which are relatively weak, so Patrick Legland, Societe Generale, expects tapering of stimulus by the US Fed to be a very gradual process.

SocGen remains cautious on emerging market. He sees good buying opportunities in peripherals of Europe. Some fundamentals like the Purchasing Managers' Index (PMI), budget deficits, competitiveness in Europe are improving, he adds. Below is the verbatim transcript of his interview on CNBC-TV18 Q: What did you make of the minutes of the Federal Open Market Committee (FOMC) meeting and how would you approach the markets now? A: On one side we continue to have some very strong figures coming from the US. The non-farm payroll at 195,000 was extremely good and extremely strong. We need also to take into account that cut in budgets are literally reducing US GDP growth by 1.75 percent. So at on one side US economy remains very solid, but on the other side Fed needs to manage its communication where it is very likely it will do gradual tapering, but there are also some states in the US which remain relatively weak and which are still lagging the economic recovery. I think this is a message which came yesterday from the Fed. Q: How do you think would smart money move? Up until now, for the past several months it has been long US equities and short risk assets like emerging market (EM) equities, EM currencies or even US bonds. Does that trade broadly change or is it only a little bit of buying that you will see in EM equities probably in oversold areas? A: You are absolutely right. To be frank there is both a lot of asset rotation right now and a lot of confusion. I can tell you that we see a lot of investors moving out from US equities which have started to be relatively expensive to invest in Europe. On the other side, the correction in high grade and high yield EM is not finished yet. There is still a lot of liquidity which is likely to get out from these asset classes in EMs. The main question is - could we have further contagion to the equity market and further contagion to the economy, to the real world. Yes, it certainly maybe oversold, but on the other side all liquidity has not been unwounded from high yield and high grade in EM. Q: What does an investor do at this point in time? Do you just up your cash levels and move out of equities or wait and watch for a bit or is this a good time to be putting in money in some of the stressed risk assets? A: Certainly, we see the current period as a very good buying opportunity. But it is almost a new era of investment in which investors are going into because we continue to see some risk in EMs, particularly on the credit side. In Europe on the other side, in peripherals we see some very good opportunities. At the same time we are seeing some fundamentals improving in Europe, the beginning of a recovery in Purchasing Managers' Index (PMI), beginning of improvement in budget deficits. Also competitiveness in peripherals is starting to improve and certainly there they have some good opportunities. Q: So it is only restricted to the European markets that you find opportunities, is it? A: I would say at this stage, yes. There will come a time where investors will have to reposition on EMs, but technically certainly the correction on high grade, high yield is not finished. This is why we will remain really cautious.