FII sell-off in EMs overdone: Nick Parsons

The global markets and currencies continue to remain volatile after the announcement by US Fed authorities on tapering government asset purchases. Speaking to CNBC-TV18, Nick Parson of National Australian Bank said that it will be difficult to predict the behaviour of the market as there are no clear signals on the price action. 

However, he said that the foreign institutional investors (FIIs) pulling out of emerging markets (EMs) was overdone.

Such markets have built up their foreign exchange reserves for the past 15 years and are very resilient in terms of fundamentals. So, it would not be surprising to see them end higher in the next quarter, he added.

Also read: Golden ratings era ending for emerging markets

Below is the edited transcript of his interview to CNBC-TV18.

Q: How is the current stability in the markets looking like? Will we get a longish breather from the savage falls? And basically does that savage fall resume?

A: The next three days are going to be difficult to interpret in terms of price action and the signals we get from it. There has been a brutal quarter. I was just writing down some numbers earlier. Gold is down 22 percent over the last three months and silver down 33 percent. If you look at equity market, losses extend down to 17 percent to the quarter in Brazil. China is down 13 percent.

So, in other words there are lots of investors who have lost a lot of money this quarter. It has been extremely painful. In fact, it has been brutal.For the next few days, the market is will be less concerned with trying to interpret what the Fed is doing. It is less concerned with whatever the latest piece of economic news is.

It will be much more concerned with actually writing that letter to investors, writing the quarterly report and essentially doing the review of the last three months. This in many cases is going to be exceptionally difficult. So, we are not really going to get any clear signals on price action over the next few sessions.

Many investors have certainly lost the will to deal and I am guessing in some cases they have probably lost the will to live.

Q: Gold has been a little more shocking for Indian investors who have a sentiment value attached to it. I was reading a report which suggested that perhaps gold could now go back to the pre quantitative easing (QE). It could fall to levels before the Fed opted for that unlimited bond buying programme. Do you think that could happen or is that looking too much into it?

A: It is sort of move that you can never rule out. Let us be aware that we have fallen more than USD 600 an ounce over the course of the last two years. So, nothing can be ruled out in these sorts of markets.

There are a lot of people who get bearish after a fall, just as there are lots of people who are very bullish at the top. Although, I would say everything is possible, it is still the case that over a very long time, gold has proven to be a store of value. I am not a gold bug, but I would say that over the very long-term it has proved to be a reasonable store.

If investors are more worried about a threat of deflation and a slowdown in the world economy and forecast for that being revised lower, the need for inflation hedges in this environment needs to be questioned. It is fair to say they were across a lot of asset classes.

Very few people have dealt over the last three weeks or so because they wanted to. They have dealt because they have been forced to. A lot of it was driven by position liquidation.

So, I would not read much into a macro story around the price action. Rather it is fact that you have reached a loss limit and one has to get out. Whether that would be a long or a short position across assets, people have been forced to liquidate. That is throwing up some real value opportunities, as we go into the next quarter.

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Q: Probably a quarter down the line you will be seeing foreign institutional investor (FII) inflows into emerging markets (EMs). That is the most unfashionable class at this point in time. Within them the Brazil, Russia, India, China and South Africa (BRICS) are even less fashionable. Do you see a return of fund interest at a particular price, both equities and currency? Where would India be in this scheme of things?

A: Personally, I believe that the sell off in EMs has been overdone because too many comparisons are being drawn with 1994 and 1998. One of them was a crisis for EMs as a whole. The other one was a crisis across developed equities as a result of the Fed tightening in the middle of the 1990s.

EMs are much more resilient in terms of their fundamentals because that is where the growth and the profit is. Most crucially, that is where foreign exchange reserves have been built up over the last 15 years so that we don’t have another 1998.

But the market at the moment is blind to that story. It does not want to listen to that story. I would not be at all surprised if EMs go higher over the course of the next quarter because it is fundamentally different this time around.

However, the extent to which investors are not prepared to look at that story is shown by a very simple - a stat that I saw on Monday. One of the main EM exchange-traded funds (ETFs) funds was actually trading at a 6.5 percent discount to underlying net asset value (NAV).

If investors prepared to be selling irrespective of price and if there is this run for the exit, I think that is throwing up some potentially very interesting opportunities for Q3.