EMs may not see huge bargain hunting soon: Mark Konyn

Global markets rallied on the back of dovish comments by US Fed and that the rollback of stimulus won't be immediate, but investors should still be cautious, recommends Mark Konyn of CCAM. "I don’t think we are going to see that big bargain hunting spree begin yet either in emerging markets or in the Asian markets," he told CNBC-TV18.

According to him, if the upside in US yields was a catalyst for money flowing out of emerging markets, then a slowdown in China could prevent money flowing back-in. If China slows, demand for commodities will decrease and therefore emerging economies dependent on commodity prices will not fair well, he cautioned.

Also read: India to perform in-line with EM index: Morgan Stanley

Below is the verbatim transcript of his interview on CNBC-TV18

Q: What about the glitches in the global market with respect to emerging markets. Is this just a very temporary respite and people will start coming to terms with quantitative easing going away soon. Basically how do you see flows happening, will there be outflows from emerging markets or inflows?

A: Certainly, we have had very large outflows through the end of June. I think Ben Bernanke’s comments trying to clarify exactly what he meant by tapering has given some respite to the markets. We have seen on fairly low volumes, markets recover quite significantly both in China and across the region over the last two days. There is a bit of profit taking today but overall, I think the risk profile for most investors is somewhat cautious. I don’t think we are going to see that big bargain hunting spree begin yet either in emerging markets or in the Asian markets.

It is going to take some time for investors to really differentiate between what is going on amongst emerging markets which typically over the last period have been driven by higher commodity prices, and those like India which are much more of a domestic economy story its going to take time for investors to make that differentiation and to be able to move money back in to regions in Asia.

Q: In terms of timeline though what is your assessment. Do you think that jobs data is strong enough for the Fed to taper its bond buying programme in the September policy itself, or do you think it may be delayed to the December policy?

A: The September timeline looks a little bit aggressive and certainly judging by the minutes, I think what we have been through now is a period where the Fed is trying to prepare the market in terms of what eventually is going to happen, which is basically a pullback from quantitative easing, but I don’t think its really anytime soon. As we know it’s not timeline dependent, it’s dependent on economic outcomes.

The job market has been recovering – the high of unemployment has been close to 9.8 percent region, it has come down to where we are now and its got a little bit further to go. Beyond the unemployment level, it is also about individual earnings improvement where we are going to see that boost coming through to consumption. So, we are seeing a little bit of a pickup in consumer sentiment but really not enough yet to signify a full blown recovery.

The growth this year is going to be around the 2 percent mark, going into next year in the US somewhere around the 3 percent mark on the back of inflation sitting around 1.5 percent. So, we are really not looking at a really steep incline in terms of bond yields but nevertheless as the market adjusts to that inevitability of a pullback from quantitative easing 3 (QE3), yields are going back up.

Q: For the rest of 2013 you think emerging markets have been sufficiently re-priced especially the bond and currency to the inevitability of liquidity flowing out or do you see further pressure?

A: There is a strong argument to be made that both the currency markets and the stock markets have over reacted to the prospects of slightly tighter monetary conditions globally, but nevertheless given where sentiment is, its probably not come off enough to really create that cut off point where investors are going to flock back to the region.

So, unfortunately on a bottom-up basis even with earnings improvements it is going to look more compelling but unfortunately its not going to be sufficient for investors to flood back in, particularly where we have got a significant slowdown continuing in China. The only thing there that is going to adjust perception and sentiment really is a revisit of stimulus measures, which is highly unlikely now in a major format in Mainland China.

Q: Will emerging markets basket itself not get money and therefore all of them get hurt or do you think there will be some discrimination made – any outperformers?

A: A little bit of rotation around the basket but I agree with the sentiment that there is not going to be a lot of differentiation. I think investors towards the end of June, pulled out nearly USD 25 billion from emerging markets. If the back up in US yields was the catalyst for money flowing out, I think a slower China is going to prevent money flowing back-in quickly.

It is not just about China and Asia, if China is slowing, the demand for commodities is not there as it has been in the last 4 or 5 years. Therefore other emerging economies which are very dependent on commodity prices clearly are not going to fair well.