Manish Singh, Chief Strategist & Head of Investments at Crossbridge Capital LLP says Chinese government's passive stance is causing confusion among the investors
Global markets showed signs of recovery on Tuesday after the bruising sell-off just the day before.
Manish Singh, Chief Strategist & Head of Investments at Crossbridge Capital LLP cautions that the bounce back may not sustain.
In an interview with CNBC-TV18, Singh says US and European markets appear oversold, but the situation in emerging markets (EMs), especially China, remains uncertain.
He feels the Chinese government's passive stance is causing confusion among the investors. Unless there is some intervention by the government, the Shanghai Index could fall further, he says.
Singh is underweight on emerging markets and says global investors will be picky while betting in this space. He recommends India as a good long term buy.
US Federal Reserve's decision on a rate hike next month will depend upon global market volatility and China’s policy moves. There is still room for a rate hike, but with more uncertainties, he says.
Below is the transcript of Manish Singh's interview with Reema Tendulkar and Mangalam Maloo on CNBC-TV18.
Reema: Is this just a one day wonder, this kind of a relief rally or are you getting early signs of selling exhaustion?
A: It is just a bounce back as you would expect from big selloffs that we saw but as I mentioned in my e-mail yesterday to my clients is that the selloff has been overdone, at least in Europe and US because I understand the thing about China and China devaluation in emerging market but we saw some really good stocks coming in into selloff which was very surprising.
So, I see this as a bounce, there are still questions to be answered and particularly some emerging market questions still remain but as I said, the sell off was overdone, so this bounce is not surprising at all.
Mangalam: You indicate that the selloff in the US and European markets are overdone, so what are you advising your clients with regards to emerging markets, are you pulling out from the emerging markets or are you reshuffling your allocation in the emerging markets itself?
A: We were underweight in emerging markets and we have been for at least six to eight weeks now. My view is that the investors are going to differentiate within the emerging market and given that where Nifty is at this time, I see this as a buying opportunity and this is what we are doing, we are adding some weight cautiously but definitely I see Nifty as a buying opportunity.
Emerging market as a whole still remains an underweight because I do see that we have more questions coming from China which needs to be answered. There was a note this morning or rather rumour this morning that maybe Chinese Yuan is going to devalue further and go to 7 by the end of this year and maybe 8 by end of next year. So, you never know.
If that happens, then you are going to see far more capital outflow from China and then other markets are not going to remain immune to it, at least emerging markets, so I see that emerging market still has a lot more questions unanswered and therefore one has to be cautious.
Now I would mention one thing, this time it is very different from let’s say a decade ago when developed market was major part of the world. Now the emerging economy is 60 percent and developed markets 40 percent.
So, what happens in emerging markets does impact everyone and we saw it this time, so I would advise caution on emerging market underway but I do see Nifty as a buying opportunity and to add on to your long positions.
Reema: What is the buzz in the markets about a possible policy action coming in from China? Is that something which has started to be priced in into the equities?
A: There are lots of things which we expect and lots of rumours are swirling that they are going to do reserve rate requirement cut, that China Securities Regulatory Commission (CSRC) is going to intervene and CSRC did not intervene yesterday.
We had learned earlier that if Shanghai Composite Index goes to 3,500, they were going to intervene. Now, it is below 3,000. So, this is what is creating a doubt in people’s mind. But one thing is very clear that the rally we saw in Shanghai Index was unsustainable given that valuation went to 60 price-earnings ratio (P/E) market went over 100 percent - we see Shanghai comps back in 2,000 level.
It might go down there because if you see that there is no buying opportunity or it is not being supported by the government then you do not know how much the sell-off is going to happen if it sold retail money and fast money.
Those are things that one has to be worried about. Of course, if there is policy action from China’s side then that would be very encouraging but so far we have not seen any indication that they are going to follow up.
Mangalam: But, could you also give us a sense of what your base case for the Fed hike has been because we understand that a lot of global strategists have reduced the likelihood of a September hike in the base rate or in the Fed rate?
A: Yes, I think we saw that yesterday. We saw Barclays is moving it to March. Fed has said that they are data dependant. Now will they be market dependant? That is the big question. I mean if they see a market sell-off are they going to hold back. I mean you might say that it will affect them, because after all, their job is to maintain financial stability as well and they cannot add to the crisis by just suddenly increasing rates. However, we still have three weeks to go.
If the market rebounds, if you see action from China if things get better, then the ground is fair enough for them to raise rates and then what is going to happen is that even if they raise rates by 25 basis points, they are not going to bring their dot plots down. So, they publish the dot plots every time to say where the rates are going to be forward. Those are going to come down and that will be a very dovish time that rates are not going to increase rapidly.
If they increase 25 basis points, they are going to definitely bring the dot plot down a lot. I still think that there is ground for them to increase. However if things get worse then that will impact the Fed’s decisions. At the moment I think that it is 50-50. Let us see what happens in next few weeks. But this is my base case that the door is still open for rate hike but not as certain as it was maybe two weeks ago.