EMs may remain in a range for 6-12 months: Emirates NBD

Arjuna Mahendran, chief investment officer, Emirates NBD Wealth Management expects all emerging markets (EMs) including India to trade in a range for the next six-12 months on the back of domestic and global worries.

In India, there is uncertainty relating to the upcoming state elections; also corporate earnings remain a concern. On the global front, China’s economic growth data is in the focus now, he elaborated.

Speaking to CNBC-TV18, he added that given the way markets have reacted to US debt ceiling issue, indicates that market participants are becoming accustomed to these macroeconomic imbalances and at the end of the day it is the liquidity that is pushing markets ahead.

Further, he pointed that buying the markets on dips is the strategy that most people have been following this year.

Also Read: Sensex at 3yr high: Here's why Samir Arora is not excited

Below is the edited transcript of Arjuna Mahendran’s interview with CNBC-TV18

Q: What sense you are getting about emerging markets like India? It’s purely been a liquidity driven rally and we have so far discarded the weak fundamentals, do you think that will be the case for the next three-six months?

A: I think so. The reluctance of the Fed to start this tapering they had promised in June basically unleashed another bout of liquidity into the emerging markets. Between June and August you saw capital dribbling away in the opposite direction, away from emerging markets, but the moment the Fed then resolved not to start the tapering, some of this capital was back and when you look back the previous months, this year has been one of buying the dips.

Whenever the market dipped particularly emerging markets, buyers have been rewarded. That pattern has set itself. It is very interesting that the US debt ceiling issue has not at all affected sentiment particularly in the equity markets, not just in the emerging world but even in the US. So, that tells me that people are becoming accustomed to these macroeconomic imbalances and the liquidity at the end of the day is pushing market ahead.

Q: What sense you are getting about valuations in India at this point in time? There are some which are going all the way at 24 times like Tata Consultancy Services (TCS) and there are others where growth is not visible. At any level are you comfortable with valuations. What would you buy in India?

A: We have seen India above 24 times in the past. In these uncertain times when five major central banks in the world are printing money galore; it is not surprising that you would see these rich valuations being achieved. Yes, the earnings on the domestic side of the economy in India are worrying, but TCS of the worlds who are more geared to the US economy and what is going on there would benefit from perceptions that the US is gaining traction.

So, I am not at all concerned about those valuations. We are in a range, not just in India, but most major emerging markets for at least another six-12 months partly to political uncertainties of the India elections that are looming and China’s ability or inability to keep economic growth sustained above 7.5 percent. We have got the number today; it has come out at 7.8 percent, but whether you will see them seeing a bit of slack early next year is a big question.

Q: If this is a range bound market that we are in especially in a market like India, we are now trapped at the higher end of the trading range. What do you do then? Do you put fresh money in a market like this or do you wait for lower levels which you perhaps expect because of the volatility that we have seen across the globe as well?

A: I would definitely start rotating within the market. I cannot talk about the Indian market because I do not look at it at a sector level. But the general presumption is that a lot of growth stocks like technology etc in the Asian space have been running in the recent weeks. Some of that momentum will stop to fade away as we go towards December and January when you see the tapering or rather the whole issue about the debt ceiling resurfacing in the US.

I would start rotating out of some of these growth sectors and back into defensives and some of the high dividend yield plays in several markets round about the end of the year just to stay safe and trade that range till we subside to lower levels before picking up growth again.