Bearish emerging markets; India better off on macros: UBS

Market may have overreacted to global problems, but developing markets are a safer bet right now compared to emerging markets, feels Hartmut Issel of UBS.In an interview to CNBC-TV18, Issel says China could ease its monetary policy further in the next few days."I would actually expect the PBoC in particular, to react fairly soon their typical fashion," says Issel."They are probably going to do it on a Saturday afternoon or a Sunday morning to keep us all busy in this financial mystery," he says.While UBS is bearish on emerging markets in general, it is "slightly overweight" on India, citing positive improving macro indicators as the reason."In India, at least on a consumer price index (CPI) level we are still in a position where are already below the band of comfort zone for the RBI which is good, we are probably not even going to stay there, we are moving within the band by year end," he says."So, not too hot, not too cold, leaves, what I believe a room for the biggest easing cycles still in Asia more than others," he says.Below is the transcript of Hartmut Issel’s interview with Anuj Singhal and Latha Venkatesh on CNBC-TV18.Anuj: Do you think it is a good time to buy emerging markets or do you see further panic in the markets?A: My sense is if I look at how indiscriminate the whole selling is. Everything here in the region but also maybe last week, everything is down by about four percent. People do not really seem to draw big distinctions between different markets or if you ask people, what exactly is it down to, some say China, some say Greece is coming back, various answers. So, it seems to me that overall, the market reaction is quite an excessive one, probably a bit overdoing it at this point. However, if I look at the more fundamental side, if I look at the yield indicators, purchase mangers’ indices (PMI), if I look at earnings growth as well and if I look at thirdly at central banks and where they stand, I actually prefer still to a large degree some of the developing markets. So, specially Europe where we still have a nascent discovery, Japan, which could potentially do more on quantitative easing. Emerging markets, by and large, we have been underweight and we remain on a slight underweight there. It is probably not the first place where I would look to engage in some positioning. Latha: What would you wait for in terms of a decision? Are you expecting that one of the two big central banks could move, either talk the market up or actually cut reserve requirements rates, things like that from the People’s Bank of China (PBoC)?A: For China in particular?Latha: Yes.A: I would actually expect the PBoC in particular, to react fairly soon their typical fashion. They are probably going to do it on a Saturday afternoon or a Sunday morning to keep us all busy in this financial mystery.Latha: That is six days away.A: Yes, actually we thought for a while already. They could do it, they have not yet, but we do think it is imminent and also with the outflows that are seeing, probably a reverse repo rate (RRR) cut so a reserve requirement cut more likely than an outright rate cut. But frankly I am beginning more and more to think, perhaps what really could move the needle if the Fed eventually does make the first step, people do not try to decipher so much anymore, when is it going to happen, so maybe we have certainty. It is also by the way, would be a signal of confidence. I think a Fed hike could potentially calm the markets more than PBoC, RRR cut, that would only be good of one or two days and then people would start worrying again potentially.Latha: So, you are actually expecting a rate hike on September 17?A: Our case is still for September for a number of reasons. But I think what the Fed will also consider is they want to raise rates this time very gradually. So, by definition, the earlier you start with the process, the more gradually you can afterwards be at a flexibility you have. And as I said, apparently the consensus is starting to price it out again that we are going to get a September hike. So, if we do get a September hike, it would also be a very clear, strong signal of confidence by the Fed and that indeed might surprise markets on the upside, on the positive side.Latha: What are you doing with India now? And in particular, is the rupee’s fall hurting?A: India, we remain on a slight overweight and India within emerging market context has a couple of benefits that many others do not have. If we look at inflation in several, even of the largest market, starting to look very disinflationary or bordering deflation, outright deflation. In India, at least on a consumer price index (CPI) level we are still in a position where are already below the band of comfort zone for the RBI which is good, we are probably not even going to stay there, we are moving within the band by year end. So, not too hot, not too cold, leaves, what I believe a room for the biggest easing cycles still in Asia more than others. So, you have that sweet spot, you can still cut the rates, but you do not have fears of deflationary pressure either. And maybe another big component that I am increasingly watching is the first quarter was actually the most disadvantageous base for earnings growth. So, the year before you had very high earnings growth, it already started to come down second quarter. Now the third and fourth, calendar quarter will be quite easy for the Indian market. So, even though you may not see tremendous progress on the reform side, but I will take improved earnings growth anytime. And I think the second quarter already gave us a bit of a precursor, it was not quite as bad anymore. We are going to see more improvements I believe.