China fall to hurt EMs; volatility to persist: Lakefield

Suspension of trading on China's stock markets post its dramatic plunge of 7 percent came as a negative surprise, says Bruno Verstraete of Lakefield Partners. In an interview to CNBC-TV18, Verstraete says his outlook on emerging markets (EMs) remains weak and believes the event will impact the rest of the world.  He believes that the volatility risks are likely to continue going forward. Furthermore, if the dollar falls on increased inflation expectations, commodity prices would rise leading to a vulnerable global equilibrium, he adds. However, he is of the view that this, coupled with the oil prices issue, will be good for the emerging markets this year. Below is the transcript of Bruno Verstraete’s interview with CNBC-TV18\\'s Reema Tendulkar and Mangalam Maloo. Mangalam: Could you give us a sense of what triggered this fall and how steep could the correction be going forward? A: I believe that the markets are clearly back into the economy mode is looking at how the economies are going to evolve looking at forward indicators and clearly this came as an unexpected negative surprise that the outlook on China and in a whole basically the emerging markets is still weaker than expected and that is going to impact the rest of the world especially given the fact that the Fed went into an interest rate increase mode in a very wrong time. The cycle in the US is not in a mood that it can support a lot of interest rate increases and that is what the market is going to look for is any indication of a slowdown in the interest rate increases will make the dollar go down, could make commodities go up and could restore the very vulnerable equilibrium that we had.

Reema: But do you believe this weakness in economic environment will persist, are equity markets headed lower and would you prefer developed markets or emerging markets in such a context? A: I believe that one thing to look at in the first place is the dollar rate. If the dollar falls and that could come because of new expectations on the interest rates. If that happens I believe commodity prices could go up. Also with increased tension on the oil prices this could be good for equity markets because it could cause a spiral of commodity prices going up, dollar going down further due to the increased inflation expectations and because of the emerging markets could benefit from it. In the short run one should not forget that the volumes on the markets especially on the European market are very low at this stage. It is slowly going to pick up throughout the week. So, one should not over exaggerate on the falls of the equity prices too much but clearly 2016 could be the year of the emerging markets based on commodity prices going up, based on the dollar going down. Before that happens the increased volatility is going to remain, the investors are going to remain very anxious on which economic indicators are coming out and this is a proof of it. Mangalam: But you see commodity prices going up only on account of weakening dollar. So, in terms of fundamentals increased demand what kind of an upside do you see or is your case that the commodity prices upside is limited? A: It is. In the first sense it will be caused by a short squeeze. Everyone in the outer is short on commodities, that needs to have a catalyst to turn around and I believe the dollar could be one of it. Everyone could turn its positions around based on a dollar weakening against the expectation of its strengthening and that could be the first step. Of course it is a supply and demand driven market. The demand is still there. It might be even a bit underestimated. In the meantime the supply has gone down because of the weak prices. A lot of the high cost producers have reduced their production rate. I will not be able to up it very quickly. So, one could see a positive surprise on commodities fairly quickly and that will help emerging markets as well, mainly the Latin American markets and in the later stage as well the Asian markets.