EM repricing not over; strain on funds to persist: Deutsche

The buy-US-equities, sell-emerging-market (EMs) theme followed by most brokers post the Fed commentary on  monetary stimulus tapering has been overtaken by talks of EM repricing, says Sameer Goel, Deutsche Bank.

Also read: 'Get used to FII outflows; soft rates may reverse trend' In an interview to CNBC-TV18, Goel says: "The hurdle for money to comeback into emerging markets still exists. But we have certainly got to a point where valuations are now better, positioning is cleaner, volatility is coming down." Goel adds that the environment for EMs continues to be challenging and dedicated debt funds that invests in EMs will continue to see redemption pressures, though at a lower scale and pace. Below is the edited transcript of Goel's interview to CNBC-TV18. Q: Whether you are a currency or a bond or an equity trader, there has been a pretty big U-turn in markets. What is the main theme that you are looking at now in terms of global flows? For at least eight weeks we had the buy US equities, sell emerging markets trade playing, why eight weeks, maybe eight months. Is that trade over or is that trade just taking a temporary breather? A: I don’t think the buy US equities, sell emerging markets (EMs) trade is necessarily over but if one is talking about it thematically, I think a big theme now is the immediate emerging market re-pricing in reaction to the concerns about Fed tapering. Unless we see the debate on the tapering change in any significant manner in the next few weeks, we are probably done with bulk of the adjustment immediately. That doesn’t mean that the challenges are over for emerging markets. The hurdle for money to comeback into emerging markets is still fairly high particularly as the global rates re-price. But we have certainly got to a point where valuations are now better, positioning is cleaner, volatility is coming down. This week, the sentiment has become better with the Bernanke comments. However, I think outside of that as well, we are clearly seeing the pace of reaction in emerging markets (EMs) come down to any further talk of Fed tapering. I do think we are reaching a point where atleast for now, we will see volatility being lower. Q: If you are saying that the emerging market re-pricing is over post the liquidity scare. How should we understand flows and therefore how should we look at the value of the rupee? The rupee at least because it’s a current account deficit country, it was quite seriously dependent on flows. Will the selling stop? Will there be inflows and therefore what’s the range you are looking for the rupee? A: The emerging market re-pricing is not necessarily over. EMs re-pricing is done for as far as the first round is concerned to the shift and sentiment on the US. The overall environment for EMs still remain fairly challenging and if one looks in terms of global flows, flows tend to lag the price action on moods and markets. _PAGEBREAK_ For example, dedicated debt funds which invest in EMs around the world, they will typically see redemption pressures continue and trail the actual price action which has happened in the market. So, I do think some of that will continue but at a much lower scale and pace. About India itself, my opinion is the first stage is for the markets to stabilise somewhat and for volatility to come down. I think that is a prerequisite for investors to consider the attractiveness of valuations and then start to come back whether it is in equities or whether it is into debt or more macro in general. I think that’s where we should hope for in the next few days and weeks. Q: What is your assessment of when we are likely to see QE tapering? A: There has certainly been no lack of confusion around the various Fed comments we have had. Of late our house view has been and continues to be that we will see the start of tapering most likely by September. Q: As the bulk of adjustment is done in the EM currencies so now on a fundamental basis where do you see the rupee headed? A: To me the view on the rupee at the moment is less directional but more about lower volatility. So, I think it will remain more in a range which is probably defined by something like 58.50 on the downside and 61 on the upside. It is hard in these kind of markets to necessarily look for the absolute levels which one can target. However, I certainly think there is more reason to now believe given the firm intent of the authorities to come in and try and cap the top side in dollar-rupee. Given the general improvement in risk environment globally, I do think we should move into a lower volatility environment.

Q: You have a guess on the trade deficit number that will come out later today? A: Our house forecast is certainly for things to be slightly better than what the last numbers were. So, we are looking for a number of close to about USD 17.2 billion versus USD 20 billion last month. That direction is now certainly fairly clear. It is the impact of that direction on the market which we will only gradually find out. Q: What about the bond range? We saw some seminal fall in bond prices as well and I think the new 10-year went even beyond 7.6 at one point in time. Where might it trade now? A: I think those two are very closely linked in at this point in time. I certainly do think that the growth inflation metric in India is poor enough that ultimately the central bank will have to give priority to the growth objective and these policies. It is certainly very complicated what is happening on the currency and therefore, makes it very unlikely that one will see any easing in the very near-term. However, I do think the bond yields should still be to that degree and if the currency volatility subsides, I think they should be buyers. Q: What are you expecting immediately, are you expecting any inflows into the bond markets at all? We did see some positive numbers atleast in India. A: Yes, we did but by and large the trend still remains for money to be exiting the bond market. We have seen almost 20 percent drawdown from the top, so I do think the scale of those outflows is certainly reducing. I think stabilisation will be the first step towards when we can expect some money to start coming back in.