Indian mkt looking for core steps; not buying it now: Citi

Citi Investment is not very upbeat about the Indian market currently. John Woods of Citi Investment feels that the market is still looking for important structural reforms. However, he expects the inflation to ease towards December.

Deferring of tapering of the monthly asset purchase programme by the US Fed helped the flows returning to emerging markets (EMs), he says. Currently, flows are directed to South East Asia from North Asia, he tells CNBC-TV18.  He is bullish on South Korea, Hong Kong, Taiwan and Chinese markets in Asia.

On the impasse in the US, he sees an eleventh hour deal struck between the participants as it is no one’s interest to lengthen the shutdown.

Also read: Roubini's rubicon: No DC deal could mean recession

Below is the edited transcript of his interview to CNBC-TV18.

Q: What have you made of the events of the last 24 hours? Do we need to worry less about the US government remaining dysfunctional and more importantly defaulting on treasuries?

A: It is looking optimistic this morning. I do want to be cautions that there is a difference between missing a debt ceiling and defaulting on interest rate obligations. Just because the ceiling is not raised doesn’t mean assumption of default is automatic. Of course, there is the ability and flexibility to service that obligations and perhaps less pressing expenditure to the end.

Nevertheless following a poll in the Washington Post, it is very evident that pressure in on both Republicans and Democrats to execute a deal just to say that 74 percent of respondents disapproved of the Republicans and 61 percent disapproved of the Democrats, if they are handling of negotiation.

There is no one’s interest currently to string this out substantially longer and that is why an eleventh hour deal is likely and it has been priced in by the market to the extent that equities have not substantially fallen too much over the last couple of months.

Q: What is in it for emerging markets (EMs) and India; India in particular? We have seen decent amount of flows. In fact it is astonishing amount of flows that we have seen considering the pathetic macros. How long will this liquidity tap continue?

A: There are a couple of reasonably positive factors impacting India. First, the currency depreciation that has played through since on the mid part of May, is essentially laying a groundwork for assisting reduce in a current account deficit, enhancing export competitiveness and bringing the country back to ultimately to higher growth.

It is proved that now the tapering has been reprised. We have started to see flows returning back to EM in general and India in particular but a number of bodies are cautioning that unless India follows through some fairly substantive and meaningful structural reforms, it will not be able to depend on foreign direct investment (FDI) to fund its external deficit.

It will remain dependent on these rather hot and slightly liquid portfolio flows which can exit as easily at they enter. So, the market will still be looking for some reasonably important structural reforms in order to maintain momentum.

Q: What is the portfolio strategy that one should adopt from now until the end of the year? Do you use every dip in the market to add on to you positions? Would you be cautious now both for India as well as for global equities?

A: I look at Asia and I look at countries and markets which I believe are most leveraged to the upswing in global trade whose earnings tend to improve as the global economy picks up and largely that is a function of north Asia.

We are seeing flows go from south into north Asia where markets are substantially cheaper and are likely to benefit more from acceleration in US growth.

It is essentially how we are recommending clients position at the moment. Try to benefit from an upswing in earnings, the likely price appreciation and the momentum behind the improvement in the global economy.