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Don't chase emerging market relief rally; like India: StanC

Manpreet Gill, Standard Chartered does not rule out short-term volatility but would add India for the longer-term.

September 18, 2015 / 12:07 PM IST
Manpreet Gill, Standard Chartered expects a relief rally in emerging markets (EMs) on the Fed status quo on interest rates. But he cautions investors against chasing prices as fundamentals have not changed.

Gill says, the US Fed statements show the central bank is focused on US inflation and US growth.

After hinting that global market volatility will not be a factor while reviewing interest rates, the Fed blinked and held its key federal funds rate unchanged.

The Fed was widely expected to raise rates at its September 17 meet, and the decision not to do so will only prolong the uncertainty in global markets feel most experts.

Stanchart prefers developed markets over emerging markets, but is bullish on India as the fundamental drivers are different from other emerging markets, says Gill. He does not rule out short-term volatility though.

"It is also equally important for investors who have exposure in Indian equities to make sure that is counter-balanced with exposure to developed market equities, Europe and Japan," says Gill.

Below is the transcript of Manpreet Gill’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.

Sonia: How would you react to what the Fed did not do yesterday?

A: I think it is a broader theme is not a surprise. To the markets, the market was quite split, strongly tilted towards no rise and that is pretty much what had played out. I think the key takeaway really here is the fact that this uncertainty, the focus on when exactly is the Fed going to hike rates, that is what is now going to persist for a little bit longer. So, that is the unfortunate side.

But, what comes across very strongly in the statement is that the supportive tilt for monetary policy is likely to stay in place in this case without the rate hike. But, even if we do get a rate hike policy makers are clearly very focused on the risk to inflation, risk to growth. So, for financial markets ultimately that means yes, we are going to get that uncertainty from the focus on when that timing would happen, but the good news is that we know policy makers are definitely have a dovish tilt even if they do end up hiking rates later this year. For us, from a market perspective, long-term that is, that is a definite positive.

Latha: We got two kinds of reactions from people. One set saying that ultimately the Fed is acknowledging severe weakness or more than expected weakness in global markets, read China basically. That cannot mean very good news for risk assets, equities or commodities. And the other reaction being that emerging markets have sold off so much in anticipation of probably the Fed hike, the slowdown in commodities that at least for the near-term, there is probably some recovery on the anvil. Your reactions?

A: At the end of the day, I am very much a fundamentals driven person. And from the US, what the Fed is telling us is that they are still focused on the policy goals which is domestic US inflation and US growth. What they are simply doing is that they are acknowledging the fact that more and more of this is also driven by what happens elsewhere in the world.

If you go back all the way to the late 1990’s arguably that is kind of situation which they are trying to avoid where they had such an excessive focus on domestic data alone, if you ignore what is happening elsewhere in the world then you end up creating risk where you might have to sort of turn around and reverse policy shortly up. So, that is a positive thing.

In terms of emerging markets yes, you are right. Sort of a relief rally in some sort might be in the offing. Indeed, we might have already seen some of that begin. I ultimately would be quite cautious about chasing that. At the end of the day a relief rally that is to drive the starting of oversold levels is a very dangerous things to chase. Fundamentals are what matter about whether that rally continues and we just do not see those fundamentals changing in the broader emerging market space.

We think there are pockets that look interesting. We think Indian equities, for example, look interesting. But commodities still look weak. Emerging markets still look weak. We think the opportunity is still very much in developed market equities, particularly in Europe and Japan, because that is where the fundamentals are much more interesting and I think it is much more important not to lose sight of those fundamentals in the midst of all this noise around, what is essentially just one 25 basis point rate hike.

Sonia: So, you have said that the relief rally will come about in emerging markets but, one should not chase it. So, what do you do with a market like India which is already seeing a five percent move from the bottom?

A: India is a different case, it is one of our more preferred markets and the reason is that we think it is not about the fundamental drivers are not similar to many other emerging markets, the kind of risks other emerging markets face. Unlike a large part of global emerging market universe, lower commodity prices are good for Indian equities, good for the Indian economy. Unlike many other emerging markets, the Indian markets are much more domestically driven. So, that is one more reason why I would prefer it.

So, with Indian equities I would still be biased to. It is one of the few emerging markets where I would be biased to actually use these levels to add from a long-term perspective, not ruling out short-term volatility. But it is also equally important for investors who have exposure in Indian equities to also make sure that is counter-balanced with exposure to developed market equities, Europe and Japan being the two that we like. So, it is about maintaining that balance, but definitely still one of our preferred emerging markets.

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