India to outperform other emerging markets: Credit Suisse

Robert Parker, Senior Advisor - Investment, Strategy & Research,Credit Suissereiterates his earlier view that India is likely to outperform other emerging markets, which is evident in today's performance by that market. Basically, investors who were underweight emerging markets as a space are now distinguishing more between different countries within EMs, says Parker. If one were to look at India’s market performance today, it clearly shows there is more focus on positive domestic cues than negative global cues.India has been a clear beneficiary of lower commodity prices, he adds.According to him there is a good chance that RBI may cut rates in the upcoming meet because the economy has been moving to lower inflation trajectory and yields to have been going down. India could soon look at 10-year bond yields declining in a 7.3-7.4 percent range by year-end. says Parker.For the markets that corrected globally after the Fed meet was an immediate reaction to the uncertainly of when the Fed would start hiking rates. But after this correction, markets would find a base and downside risk could be limited, thinks Parker.

Below is the transcript of Robert Parker’s interview with Sumaira Abidi and Sonia Shenoy on CNBC-TV18.Sumaira: We are seeing a bit of subdued to a negative move to a negative move in the European indices. What is your sense of how things are going to shape up from here? A lot of people are saying that perhaps the rate hike could be deferred to as late as March, next year. What is your own sense of where things might progress?A: I would say the immediate market reaction is reflecting the uncertainty about when and if the Fed will move. And you see that in the futures markets as well. And as we talk- the futures markets are discounting only less than 20 percent probability that the Fed will increase the Fed funds rate at their October meeting and less than a 50 percent probability that they will increase in December. So, you have got confusion in the futures markets. That is reflected in, as you said, a slightly mediocre reaction to the Fed move. Also, the market has taken on board the Fed’s comments that they are concerned about the strength of the US dollar and the impact that that has on inflation and of course that comment is absolutely valid. And the slight strength that we are seeing in the yen and the euro is obviously not a positive factor for Japanese or European equity markets. So, the immediate reaction in the markets is logical. In terms of where we go from here, I am assuming that after this correction, we will see a base being formed over the next week, possibly two weeks and I think the downside risk is probably fairly limited. And if one goes back to the fundamental picture, we have got very easy monetary policy in Europe and Japan and a delayed tightening in monetary policy in the States. And that has to underpin equity markets going forward.Sonia: It is interesting you say that there is uncertainty in some of these markets like Europe, but we are not seeing that kind of reaction here in India. The Sensex is actually up 500 points today and there is a big move seen in the banks. Are you getting a sense that now that the Fed event is out of the way, the emerging markets like Indian could perhaps, move on a trajectory of their own and focus more on domestic cues which seem to be picking up now?A: I think it is a very good point which is that if one looks at investor positioning, investors are very underweight global emerging markets worldwide. Investors have been very cautious and you have seen that in the underperformance of the emerging markets now, literally for years. Having said investors are increasingly not treating emerging markets as one asset class. But they are  distinguishing much more between different markets and there is genuine concern about the extent of the slowdown in China. So, the caution on China is still valid. There is concern about the fact that Brazil had its credit rate downgraded. And obviously there are a lot of concerns about the outlook for the Russian market particularly for the oil prices staying low. Now, which economy is actually where growth is picking up, which economy is a major beneficiary of low commodity prices? That is India and a lot of investors are focusing on what we call the growth crossover whereby now, India is outpacing China. And therefore, I come back to what I said the last time we spoke which is that the probability is that India will now outperform other emerging markets in the reaction today.Sumaira: Just this morning, the reserve Bank of India governor, Raghuram Rajan also went on to say that monetary policy will be accommodated to the extent possible. Do you think he could have given away a rate cut news from next week?A: I think there is a good chance of that. I think it is actually quite interesting that India with low oil prices and with low commodity prices, we obviously have this big divergence between the different indicators of inflation in India, and that is a statistical conundrum, but the reality is that India is now moving to lower inflation. And therefore, if one looks at 10-year Indian government bonds with the yield of 7.7 percent, I think those yields are going lower. By the end of this year, we could easily see 10-yields in India close to 7.4, even 7.3 percent with the Reserve Bank of India, yes, following a more accommodative policy against a background of lower inflation.