Bihar poll result impact to be brief; earnings key:Rabobank

Asian market is somewhere between the bulls and the bears on the back of low Chinese services data and a temporary rise in crude prices, says Michael Every, Rabobank. Speaking to CNBC-TV18, Every calls the trading link between Hong Kong and Shenzhen to be “utterly irrelevant”. “The Chinese equity markets are such enormous bubbles which have burst so messily and are seeing such heavy intervention from the Chinese authorities,” he says.Meanwhile, he believes some Indian sectors are expensive but are not “out of line with the fundamentals as is the case with many other places.” State elections may cause a short-term volatility but for the long-term, market price is only about corporate earnings, he says.Below is the transcript of Michael Every’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: With the Chinese services data and the smart rise we have seen in crude prices, will emerging markets (EM) now get a better look in?A: Temporarily, but it is really just a micro trade. This is one month’s data in a series which was particularly weak last month is now showing a reading that is far from impressive – 52 would normally be considered worryingly low in China. But, obviously it is slightly better than it was. And if we are going to try and build a sustainable rally on the back of that, I think we are being extremely bold. I fail to see fundamentally what has actually improved or changed in the global economy in the past couple of months to justify people running around from extreme bearishness to extreme bullishness. I think we are somewhere between the two and I do not think this number today changes anything really. Sonia: But the other news flow that has come in this morning is that China is set to launch a trading link between Hong Kong and Shenzhen before the end of the year. And ever since that news flow broke out, we saw the Hong Kong market rally almost 700 points. How much of an impact do you think that could have?A: Short-term, we have obviously seen the impact, but in terms of what it actually means, I think is utterly irrelevant. We have already seen previous links set up between Hong Kong and the mainland and what we are actually seeing is that most foreign funds do not want anything to do with them, purely because the Chinese equity markets are such enormous bubbles which have burst so messily and then seeing such heavy intervention from the Chinese authorities. Why anyone thinks that a link to the Shenzhen market which frankly makes the Shanghai market look quite calm and sedate by comparison is actually going to be something that people want to get involved with, I really fail to see. The price/earnings ratio (P/E) valuations in Shenzhen are quit ridiculous in many places so, I do not think again, there is any kind of foundation for anything than a knee-jerk response.Latha: How are you looking at the Indian markets now? The results season is about two thirds underway and we have a provincial election, a state election whose results could be seen by some people as a referendum on the central government.A: In terms of earnings numbers, that is what you really have to be looking at because at the end of the day, equity prices should be about fundamentals rather than trying to guess what Central Banks are going to do, etc. If the earnings are holding up, share prices should hold and if they do not, they will not – simple as that.In terms of the elections, the markets do not have anything else to trade off of. When we have a quite day, whether there is not any speculation about Central Banks for one, we like to then speculate on other things that really are of marginal relevance. And I do not actually think that in the big picture for India, this particular state election is going to be of any kind of historic proportions at all, but near-term yes, there is a risk of some volatility. Clearly, because the market is telling itself that there is going to be some volatility. So, it has to then deliver on that promise.Latha: So, are you buying at current levels in India?A: To be honest with you, I do not make buy or sell recommendations actively across any economy in that particular respect. That is not what I do. I just try and look at the fundamentals and try and understand whether I think a particular market is out of line from what I see going on with the real economy. At the moment, actually, I think India is relatively better placed compared to many other markets I look at. And while the equity market may still be expensive in some particular sectors, it is not ludicrously out of line with the fundamentals as is the case with many other places.