Dollar bus won't stop at 60, get in now: Eastspring

After the robust performance displayed by the dollar in the past few days, Nicholas Ferres of Eastspring Investments recommends investors to buy the greenback now. He says the dollar will continue to perform well even in the coming days.

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In an interview to CNBC-TV18,  Ferres adds that emerging markets (EMs) will continue to underperform. He says the pressure on commodity linked markets, the dollar's strength and rise in yields will all cause discomfort for markets like Brazil and South Africa. Below is the edited transcript of Ferres' interview to CNBC-TV18.

Q: Are you bracing yourself for more outflows from the emerging market (EM) universe given the data which has come in over the weekend?
A: I think the key message for investors is just buy the dollar. The dollar was quite strong over the weekend on Friday night and probably that trend will continue. In particular, the markets that are linked to China will also come under additional pressure because this is not just about dollar strength or a normalisation in the US economy, it is about the weakness in China, particularly on the macro front and also the tightening in liquidity conditions that we have seen over the last few weeks as well. Basically the trends that we are seeing at the moment will continue for a period of time. Q: Do you see EMs continue their underperformance relative to US equities as well in line with what you are suggesting about the US dollar?
A: I think so. I think for the time being, the commodity linked markets, the larger markets within the EM complex are the ones that are coming under additional pressure. For example, Brazil, South Africa and some of the other commodity linked markets are probably the most vulnerable given the move in commodity prices, the strength in dollar and the rise in yields that we are seeing at the moment.
Selectively, I am looking to add risk into some of these markets. For example, in China, we have added a little bit of this over a week or so ago. China is looking interesting. If you look at the Hang Seng Composite Index (HSCI) it is trading at about 6.5 times earnings, probably even lower after the price action today and price itself is already incredibly oversold. So, I think there are selective markets within the EM complex that are starting to look interesting. But I would not fire all my bullets just yet. Q: Picture gets complicated for a commodity importer like India. The price of crude has actually surprisingly moved higher because of the Middle East tensions. Would you have any kind of views on either crude or how to play India now?
A: Hopefully, the price action in crude will not be sustained. If one is getting dollar strength and slowdown in China, I think the fundamentals there are probably more important in the medium-term. So, hopefully this is actually an opportunity for India. One ought to see crude stabilise from here. I do not have any special insight into the Middle East politics, but the point is that the price of crude is probably moving against fundamentals and that eventually if the Middle East situation settles down then fundamentals ought to bring the price of crude lower and that ought to be helpful for India. Q: Do you see a lot of money going out of fixed income investments in the emerging market space because that seems to be happening for many countries putting a lot of pressure on those currencies?
A: I have not seen the latest flows myself, but certainly the message we have got over the last few weeks is that there has been a significant redemption of flows out of that and for us, that is a clear key vulnerability in the markets that have benefited from low rates in the developed world, particularly in the US will likely to see further pressure. It is also a story about deteriorating fundamentals in places like China. For example, Indonesia which is an exporter of commodities is not only seeing pressure from the dollar side, but also it seems slowing demand for some key exports like coal. So, it is getting hit on the terms of trade front as well as from dollar strength and potentially on the flow side of things.