For emerging markets, 2014 will be much better than 2013, says Jeff Chowdhry, Head of Emerging Equities, F&C Investments. He says this year won’t be dominated by tapering, but it is all about stock selection and liquidity in various markets.
Also Read: Emerging markets' output growth slows in Dec: HSBC
The US 10-year bond yield is hovering around 3 percent, but it hasn’t impacted fund flows into India. Chowdhry does not think the US economy is strong enough for yields to rise much from current levels or to the 4-5 percent level.
He feels the Indian market in 2014 will largely be driven by politics. High CAD continues to be a concern for the market. According to him, investors would like subsidies to be removed soon. He continues to like banking, especially private banks, IT and the pharma sectors in India.
Below is the verbatim transcript of Jeff Chowdhry's interview on CNBC-TV18
Q: Tapering when it comes will not be anything as disruptive as it was hinted at in May 2013. But while emerging markets like India coasted through December, now, as the liquidity actually begins to lessen, will we at least see incremental flows not coming into India or fall to a trickle?
A: I think the outlook for 2014 for emerging markets is generally better than in 2013. In 2013 the worry was when will tapering start and what the likely impact is going to be. In 2014 it would be much less about tapering and more about stock selection and liquidity in the various markets and including interest rates.
Q: The US 10 year yield has crossed 3 percent, no impact yet on the likes of India, will this yield rise further? Should we see some fund outflows on account of that?
A: My belief is that the 10 year bond yield in the US won't rise too much from current levels. The US economy is obviously recovering quite nicely and inflation is under control. But I don't believe there is enough strength in the economy for US 10-year bond yields to go to 4-5 percent. With that background I think emerging markets in particular look attractive simply because of the valuation gap between them and the US in particular, which has now got to a fairly extreme level.
Q: In the first half of 2014, what may be the top three asset classes by way of returns?
A: It is difficult because there are so many asset classes out there. I think global smaller companies will continue to do very well, liquidity environment is still very attractive. Corporate bonds will probably do quite well as an asset class. Again the environment for liquidity and earnings is quite strong and I would put EMs up there may be not necessarily in the first six months but certainly for 2014 I expect EMs to do better than Japan and US.
Q: Will India receive the kind of foreign portfolio flows that it got in 2013?
A: India could be a special case this year, you got an election coming up later on this year and around election time it is always very difficult to make forecasts. At this point in time I think the important thing is for the economy going to recover, one. Secondly is the budget deficit going to improve and thirdly are the politicians likely to bring the deficit down. So there is quite a lot of things going on in India and India could very well be a market which does very well in 2014 but I think a lot of it will be driven by politics.
Q: Do you like to buy Indian equities now? Some are buying on the hope that a BJP-led coalition will come, are you buying, if yes why?
A: I am not very keen on buying a particular market because of what I think might happen in terms of election. I think that is fraught with problems. First of all you don't know whether a particular party is going to win and secondly if a particular party does get into power you don't know whether they are going to actually implement the policies that they talked about. The most important thing for us as investors in the market is, whether the economy on a sound footing, is it likely to grow in a less inflationary environment and inflation in India continues to be a problem at this point in time and is the macro footing in terms of the fiscal deficit, current account deficit, stable.
On top of that, do we have a tax regime for example any bureaucracy which encourages investments? If all of those are in place then I think India will attract more money but there are a number of hoops to jump through before that happens.
Q: What equities would you like to buy in India now - IT and pharma stocks, or a definite move to buying cyclical stocks?
A: At this point it is a mixture, we still very much like the banking sector, a number of private sector banks continue to do very well, we continue to like the IT sector because domestically and more importantly internationally the environment for IT companies is very good. Indian companies are very competitive in that particular area. Pharmaceutical companies are also competitive. So I am looking for private sector companies which are well run, which have got good management, good corporate governance and have competitive advantages. Those three areas are where I think India has good competitive advantage.
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