India still a top pick within EM equities: StanChart

In an interview to CNBC-TV18, Manpreet Gill, Senior Investment Strategist, Standard Chartered shared his outlook on global markets, emerging markets, expectations from Fed and currencies.India amongst the emerging market basket has been their top pick for the last six months. He thinks if the reform momentum is sustained then Indian equities are sure to rally. Although the rupee is at risk if the dollar continues to strengthen, the weakness would be limited and it would outperform other EM currencies going forward, he adds.However, the dollar index is likely to strengthen further, says Gill.Commenting on the expectations from Fed, he says if there is continuous flow of strong data in the US, the rate hike could come by mid-2015.

Below is the transcript of Manpreet Gill's interview with Ekta Batra & Anuj Singhal on CNBC-TV18.Anuj: What is your call on emerging markets now, do you think the froth is out of the system and some of the markets are good buys again, markets like India or would you be slightly nervous about the emerging markets from hereon? A: Equity markets globally, we are still positive so that is the way I would start looking at it. However, there definitely is quite a bit of differentiation between the developed markets and emerging markets (EMs). Ultimately the way we are looking at it a lot of the growth today is coming from the developed markets, more so the US while many emerging markets still are trying to go through the process of reform. So, within EM world, we think it is much more about being selective. India is one market where we are actually still overweight because we think the reforms happening are directly and immediately positive for the equity market. However, you can’t say so for many of the other EMs.Ekta: Just wanted to back track a little bit and ask you about the FOMC policy last evening with new words such as patient and maybe nothing that we can expect at least for the next couple of meetings. What are strategists talking about when it comes to the first Fed rate hike? A: The market does fairly exhibit consensus range from anywhere from Q2 all the way to year-end and few people even arguing in 2016. I think what the Fed has done to its current language is given itself wiggle room in essentially saying that on one hand noting that labour market is improving but on the other hand giving itself room that inflation also needs to pick up. So, in our view we still think they look on track for a mid-year rate hike and as long as the data keeps coming in strongly we think that is where the Fed will act. The market is priced a little bit later than that but there is maybe a little room for adjustment but it is not substantial.

Ekta: What is your sense in terms of the dollar index, it is already at 89, how much further do you expect it to move? A: The dollar index can go much further. If you go back in history whenever we have had periods of multiyear dollar bull market those tend to last anywhere from five to seven years. So, in that context we have only begun to move the needle today. However, having said that the magnitude of strength always varies; with currencies what is on the other side is always important. We think that much more strength will come through against currencies like the euro and yen where monetary policy is going in completely different direction against currencies like the rupee there are many other factors including flows at play so the story may not be as strong. Anuj: Where is India in your pecking order among emerging markets? A: Among emerging markets it is still our top pick. It has been over the past six months or so. For us it is a question of reforms; reforms are one of the key drivers in emerging markets and like I said that is not always positive in all markets. However, in India’s case what we think we are seeing is ultimately the multiple driven rally that usually occurs anywhere from six to 12 months ahead of actual earnings growth coming through. As long as that reform momentum is sustained equity markets should continue to do well.

Ekta: I just wanted to ask you one question related to India. The rupee's resilience that we have seen is now coming a little under question at least in the past couple of trading sessions. For today it is stablised but in the past few days we have seen depreciation at least on a day-on-day basis. In your sense would that be a risk to your stand for India and your overall call on the rupee as well as oppose to other emerging market currencies?A: The currency is a risk but just given how much the fundamentals improved, we don’t think it will make a huge dent to your total returns either on the equity or bond market side. Ultimately the rationale here is it would be unrealistic to expect the rupee to stay where it is or potentially even strengthen further if we do see significant dollar strength come through.At the end of the day even for a bond market investor as long as that weakness is limited to when you are in 3-5 percent that is still pretty decent, pretty chunky US dollar returns and the equity market even more. We think the rupee will still outperform most other Asian and money market currencies.