Funds exiting EMs; more sell-offs to aid valuations:Parsons

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

Sonia: The Sensex has fallen almost 1,000 points over the past two days. Is India losing its sheen amongst global investors and if yes why?

A: I think we can’t divorce what has been happening very recently in India from a broader move in emerging market (EM) equities aside from China. Let us put China to one side for a moment. However, if you look at the whole EM universe, the Morgan Stanley Capital International (MSCI) index has fallen for eight consecutive days. We have to go back to August of last year to find the last time we had eight consecutive declines. So there does seem to be a little bit of a move away from the EM more generally.

I think it is tied in with an increase in volatility on a rising global bond yields. There are perhaps some India specific worries but a lot of what we can see appears to be stories made up to fit the price action rather than stories actually explaining it. So, in that sense, we wouldn’t be too concerned with the view that India somehow is about to significantly underperform.

Latha: You started off with the China argument, is it that some of the investors are selling India to buy China?

A: It is not a noticeable one from India to China but that does seem to be a lot of talk of US money going into it, which I find quite unusual and I find quite surprising given the scale of the gains that we have already seen. As of Monday this week, China broke the 50 percent increase level for the year-to-date (YTD).

Whilst there maybe some momentum based investors, some model type funds who were simply chasing the market because it happens to be going up, I wouldn’t have thought the fundamental argument for chasing China is particularly robust at these levels. So, I think we are seeing a bit of rotation, a bit of momentum based investing but certainly I would be very hard-pressed to make the case for significant outperformance of China relative to India.

Sonia: This anti-EM trade that you just spoke about, do you see it continuing or is it at an end?

A: I don’t think it is at an end just yet because in part that is linked to higher volatility and higher yields in global bonds. There is an increase in global bond yields; German 10-year yields have gone through 80 basis points (bps) for the first time this year, France is now up through 100 bps and even the US has added to choose these gains in yields that is with a further 3-4 bps increase and that is just putting investors off for at least making them wary of the potential for bit of a spike in volatility and then an argument that says equity markets generally might just be in for a pause.

Perhaps one statistic I could throw at your viewers is to say that if we look over the last 20 years, I am going to talk hear about Dow Jones index in the United States, but if we take that broader span of time, over the last 20 years, the month of June has historically been the second worst month of the year. If we look over the last 10 years, eight of the last 10 Junes have seen a decline.

Latha: Can you just give us a little more perspective about this yield rally that we saw even yesterday both in the US and in Germany, why are yields rallying so sharply all over the world and do you see that continuing for sometime, how long?

A: Globally there is a perception that the processive deflation is not just at an end but is actually being reversed in the eurozone, which had the biggest policy response we have seen inflation move from minus 0.6 percent -- low point already -- to plus 0.3.

We are seeing European Central Bank (ECB) President Draghi pretty confident in his latest press conference that we will be up at 1.5 percent in 2016 and then 1.8 percent in 2017. So, unless we were to see a further dramatic decline is oil prices, base effects alone seem to ensure that inflation is going to pick up and with the pick up in inflation, we are going to see bond yields continue to rise.

Sonia: Coming back to the Indian markets, since March 3rd, the Nifty has fallen almost a 1,000 points; that is at least 10 percent or more than that today. When do you think India or for that matter the EMs will get attractive again in valuation terms?

A: I think for valuations to become compelling we would probably need to see a more general sell-off in EM. At the moment that is not yet there. So, it is not compelling. We are going to see a drift off and an extension of the recent declines but I don’t think it is going to develop as yet into a rout unless we were to see more substantial declines in equity markets globally.

For the moment, it seems confined to the EM universe and I think confined and contained would be the words I would use to sum it up. However, no particular reasons to dis-favour or to dislike India anymore than anywhere else.