Cautious on India due to high valuations, low yield: Geoff Lewis

With the US jobs data logging its weakest monthly gain in more than five years, the possibility of a Federal Reserve interest rate hike in the near term has been ruled out, says Geoff Lewis of Manulife Asset Management. In an interview with CNBC-TV18, Lewis, however, said the weak jobs number was likely an aberration and is not an indicator of an impending recession.Lewis talked about Indian equity markets, saying a combination of high valuations and low dividend yield compared to Asian peers make him cautious on it.But he added that a pause in the Fed's rate hike cycle would be positive for emerging markets.Below is the transcript of Geoff Lewis’ interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Sonia: This is the fewest number of jobs that the United States has created in the last five and a half years, so that comes as a big shocker. Of course the June rate hike may be off the table, but would you be concerned about the slowdown that we got in the jobs data?A: If this is the start of a new trend, I think there was some concern whether weakness in final demand, in investment demand for example, would see through into lower jobs growth. Normally, the non-farm payrolls is a reasonably smooth trend like series, but we do get aberrations from time to time. Certainly, this was a shock. It was a weak report all around. It rules out a June rate hike obviously, and we will be looking now to see whether in fact, the US economy is slowing although I would point out that the Atlanta Fed nowcast is pointing to a pickup in gross domestic product (GDP) growth in the second quarter.Latha: So, what does this mean to an emerging market investor? We did not see a very negative reaction in the US market itself. It just ended marginally in the red. Today, we are getting red cues across the Asian markets but that is more because of their own woes. Nikkei for instance is battling a slightly stronger yen. So, as an emerging market investor should be worried that financial markets will be disrupted a lot by this jobs data?A: This is just one data point, so it is too soon to declare that the US is slowing, it is a recession, that would not be our view. But, it was always on the cards that after such strong growth in payrolls, unless we saw a pickup in final demand, we now had two slow quarters in that area, then job growth would decelerate. But what has been surprising is just how low this point is. I do not myself think it is representative of the new trend and still see US continue to grow at a reasonable pace in the second half of the year. So, I do not think there is need for emerging market investors to be panicking at this stage.Sonia: In the Indian markets, there is so much buying that we have seen over the last fortnight or so. How are you positioned on India because nine out of ten people are very bullish post the recovery that we have seen in earnings? Would you be one of them?A: We are still a bit cautious towards the Indian market particularly on valuations where it is still at a premium to other Asian markets. Also in terms of divided yield wherein India offers a lower dividend, it is still a market we like for the longer term. But I do not think we have seen anything to really make us change our view in terms of the data that has been released over the last couple of weeks or so.Latha: I basically wanted to know how the odds change now that the Fed rate hike probably has gotten pushed definitely to July, maybe to September. Therefore, do emerging markets react positively, because the rate hike is not there? How does that impact emerging markets?A: There are two sides to the coin. As you say, emerging markets will be relieved that the Fed is not raising rate aggressively and from that point of view there is a sigh of relief. But, the more rational view would be that it is in the emerging market’s interest to see a strong, robust, healthy US economy rather than an economy that is faltering and that is the new risk that has now appeared after the May payroll data.Latha: The other thing I wanted to ask you, since we have you with us, Brexit. Now, we are about 18 days away from the vote. Should the markets start pricing in anything at all?A: The market is finding this kind of binary shocks very difficult to price in and it is too close to call. We have seen an impact on sterling, much less of an impact on gilts, so that is perhaps because if there is a Brexit vote then we could actually see whether than supports the gilts market. So, it is a very difficult situation for markets to price and at the moment, it is anybody’s guess.