Top money manager and emerging market expert Adrian Mowat has said that active funds are rotating money out of India and other EMs to move into China after the recent stimulus push by the PBoC, however it will be difficult to measure the overall size of this positionings.
Talking to CNBC-TV18, Adrian Mowat said several active fund managers who were Overweight on India may be trimming positions in order to rotate money into China. "They may sell where they are Overweight to buy China stocks," said Mowat, adding that it will be tough to measure the overall size of this Overweight position. India has been a relative outperformers in the EM pack this year.
China Stocks on Steroids
Despite the sharp run up, Chinese equities are still at a very low valuation compared to historical averages, Mowat said. "The Chinese equities they're buying into are still very inexpensive," he added. Bloomberg News reported that the MSCI China index is trading at 10.8 times forward earnings, still below its five-year average of 11.7 times.
Mowat added that the level of policy support from China this time is 'very significant'.
"I think the level of Chinese policy support in on par with Mario Draghi's, when he coming out of the GFC into the Euro crisis, he said that he'll whatever it takes," Mowat recalled.
The central bank's push to revive growth in China is ensuring that the value of financial assets are getting inflated, Mowat added. He said that to address the economic problems, China's growth measures have increased the value of financial assets before growth follows. "That is very important in improving the collateral within the financial system, which takes some of the stress out of the balance sheet recession," said Mowat. "Look at it as the medicine that will be good for the stock market, we can answer the economic story a little bit further on."
This, he said, will imply some pressure on Indian equities, as active funds are Overweight on India, given India's weightage on MSCI EM index is now above 20%. "Short term, India is under particular pressure as it has been a long-term bull market, and a big outperformer. The positioning with FIIs is bullish, and they need to sell some of that to buy in China in order to reduce their Underweight, and reduce the pain they are experiencing in underperforming a rallying China." India is on the wrong side of this flow story, Mowat added.
Middle East Turmoil
On the middle east tensions, Mowat said the situation is escalating, and one needs to see if the US will approve of any attack by Israel on Iran's nuclear facilities. These factors are playing out in the crude oil market as well, with Brent Crude rising past the $75 level, sharply off recent lows.
Traditionally, geopolitical events have play out such that there has been shorter term impact on world markets, said Mowat, citing the example of Russia's Ukraine invasion which was a shock for EU in terms of energy cost. "The issue with crude oil is that it is a very fungible asset, unlike gas which requires pipes. We may see a temporary spike in oil prices even if this escalates a bit further," Mowat said, while caveating that he is not sure if the impact will be there in the medium term or not.
How Much More Selling?
This selloff has come after a decent September, Mowat added. However, he said he does not see a 'significant negative delta' on the downside in India, and may be a modest negative in oil prices moving up. Brent crude has tested $75/bbl levels after news website Axios reported on Wednesday citing Israeli officials that a retaliation by Israel could also target Iranian oil production facilities, among other strategic sites.
India's ongoing bull run has been driven by local investors and domestic institutions. "I think if there will be a correction in India due to little bit of foreign selling and DII selling due to geopolitical concerns, it will be a modest one, nothing more," Mowat added.
The bull run has been very powerful, and there may be nothing wrong in a bit of a correction, said Mowat. "May be another 5% to go, but nothing in Indian fundamentals to justify a more dramatic selloff."
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