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Last Updated : Aug 24, 2015 04:29 PM IST | Source: CNBC-TV18

Deep correction unlikely in US; overweight on India: Nomura

Within the Asian region ex-japan, Michael Kurtz Chief Asia Equity Strategist, Nomura is worried about the Chinese growth but is optimistic on India.


Although global markets saw a major correction on Friday, followed by further correction for the Asian markets on Monday, Michael Kurtz Chief Asia Equity Strategist, Nomura is not overly worried of US growth going forward.

According to him, US is still looking good with strong home and auto sales data and does not think there is a strong case for a deep correction in US equity markets.

Within the Asian region ex-japan, he is worried about the Chinese growth but is optimistic on India.

India, he says is the top pick for the house and largest overweight. Moreover, falling commodity prices and oil is aiding India and keeping us more positive on it, says Kurtz.

Below is the transcript of Michael Kurtz’s interview with Sonia Shenoy and Reema Tendulkar on CNBC-TV18.

Sonia: How are you reading into the flows situation? Do you expect to see significant incremental outflows from emerging markets (EM)?

A: I would not say that we are so much expecting it as we are already seeing it and this has been a phenomenon more or less at play across the Asia ex-Japan emerging equity space for the better part of two months now. Perhaps a more interesting question at this point is what might still be on the horizon to help stabilise these flows and stabilise markets. And on that particular issue, it is very much about China and questions about whether or not Chinese growth is turning steeply downward.

Reema: The big worry came on Friday when the mother market – Dow Jones Industrial Average (DJIA) fell close to about 500 points, something like the Standard and Poor’s 500 (S&P 500) has slipped close to about seven and half percent from its peak in May. Do you pencil in a bigger correction for the US markets? Can it get into perhaps bear territory as well?

A: I do not think there is a particularly strong case for a deep correction in the US equities space. I know there tends to be quite a bit of talk these days about valuations, but we think that valuations in the US are only slightly above their long-term averages and not really at the sorts of extreme multiples that would almost insist upon a deeper correction.

We have also seen already a significant push-back in terms of market expectations about the timing of Fed lift-off away from a slightly higher than 50 percent chance of a September Fed hike to now much more of a December or even later expectation in the market. And that suggests that much of the urgency in the US equity space may ultimately be satisfied and investors who are eager to pick up US stocks after the pull-back should be stepping in relatively soon. 

Sonia: So, how are you approaching India now? I mean the consensus view seems to be that India will continue to outperform but looking at today’s market you get a bit cautious. What is you view about how to approach India for the next 6-12 months?

A: We do also like India. In relative terms, we have India as not just an overweight, but in fact our largest overweight recommendation in the Asia pack ex-Japan region. We still think that India is largely a story that is being driven by the domestic growth cycle and certainly spurred on by what reforms the Modi administration and as we were listening just earlier, Governor Raghuram Rajan at the Reserve Bank of India (RBI) are able to collectively put together.

India related to the rest of the region, it is important to keep in mind that commodity price is falling, whether they be metals or for that matter oil prices are actually substantially positive for India. And in that respect as the world continues to worry about Chinese growth and the impact that slower Chinese growth has on commodities, it actually tends to play into India outperformance and keeps us more positive on that market.

Reema: This seems to be a global growth scare. In the past, these concerns have been addressed by monetary easing by various countries. But the efficacy of that has been questioned. How do you expect us to get out of this challenge of global growth and how long will it take?

A: That is a great question and I think it is the very question that markets are worried about right now. If we go back to the Asian crisis 1997-1998 for example, the Fed started at 5.5 percent in the beginning of that crisis and before 1998 was out, the Fed had cut 75 basis points to 4.75 percent. The Fed today is only 15 basis points and so markets to some degree are worried that the Fed is not in a position to help. But we need to think in mind that growth in US is actually holding up quite nicely.

We have had very strong housing market data and very strong auto sales in the US suggesting that that economy is in fact, continuing to contribute its fair share to global growth. The concerns are really about China specifically. And we should keep in mind that with China’s base lending interest rate, its 4.85 percent with the reserve-requirement ratio at 18.5 percent and with the debt-to-gross domestic product (GDP) ratio for the Central Government at 60 percent of GDP, China has tremendous firepower still to further ease policy if it becomes necessary to support growth and in that respect, markets are perhaps getting a little too pessimistic about the China outlook.

Sonia: But this pessimism also stems from the fact that ever since we have seen the China devaluation of the yuan, it has been sort of a currency war brewing across most other emerging markets and we have seen a big competitive disadvantage especially for markets like India. Would that not concern you?

A: In fact, if you look around the Asian region, what you find is that it was not really just a renminbi depreciation in isolation, but rather that to varying degrees around the region, most Asian currencies depreciated along with the renminbi and in fact, we expect the same pattern to play out to the tune of about another three percent downside on the renmnbi.

So, rather than think of this as China versus the rest of Asia, I think it is actually quite appropriate to think in terms of China and its Asian partners if you will in terms of the integrated regional supply chain and production chain becoming more competitive relative to the rest of the world.

And when we see ultimately that this is not really a devaluation in terms of say a double digit move in the currency by really just a sort of a constructive venting of a small bit of deflationary pressure and small bit of currency overvaluation. it may ultimately be read by markets as indeed, risk-reducing rather than risk-increasing.


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First Published on Aug 24, 2015 10:57 am
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