In an interview to CNBC-TV18 Benoit Anne, managing director, head of EM strategy, Societe Generale said that investors are downbeat on emerging markets (EM) in the near-term given the poor dynamic across asset classes.
“We are very much in risk aversion shock. Chinese data is adding oil to the fire in the near term. So, the high beta currencies in Asia those that tend to respond to shocks, to sentiment understandably so are really trading poorly,” he added.
He further added that though one is seeing some positive developments in India’s macro-economic scenario, but the key trigger would be general elections scheduled in May. As far as investing in India is concerned, Societe Generale has adopted a wait and watch mode.
He recommends investors to be cautions since the global environment continues to be quite challenging.
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Below is edited transcript of Benoit Anne’s interview with Sumaira Abidi and Reema Tendulkar of CNBC-TV18.
Q: We have seen pretty sharp cuts for the Asian markets by the close of trade. Also lot of the fund manager surveys that we got suggested that they are now downbeat on the emerging markets how are you all approaching the Asian markets and after the cuts that we have already seen are you foreseeing more downside in the near term?
A: In the near term, the dynamics look quite poor. We are very much in risk aversion shock. Chinese data is adding oil to the fire in the near term. So, the high beta currencies in Asia those that tend to respond to shocks, to sentiment understandably so are really trading poorly. Asia has been fairly resilient compared to its peers in EMEA and LatAm the past few days have been extremely poor in terms of price action. We have seen a correction that has been quite severe in many places. So, near term it is not looking particularly good at all across all asset classes in emerging markets and investors are quite downbeat at this stage.
Q: For the rest of 2014 as things move from here what are the triggers that you would be looking at which could perhaps get a more positive view on the emerging market space then?
A: We need a combination of three different things. We have been talking about growth fundamentals and China story. I would like to see an uptick in growth in emerging markets with reassurance that emerging markets growth is back in Asia, but also in some other places. When we see that we will feel more comfortable about exposure to EM equities and EM currencies.
Investors were negative about emerging markets. Those long term investors that want to be positioned in the bond markets, we are seeing outflows in that area and I want to see a turnaround. I want to see inflows coming back into emerging markets. That will be a very important trigger.
Third point which is also quite important ahead of next week I would like EM investors to realize that in my view the impact of Fed tapering is now fully priced in and the dovish forward guidance is going to create a window of opportunity to return to emerging markets. However EM investors need to be convinced about that before we see that turnaround. So, these are three important catalysts to watch for.
Q: India has outperformed the rest of the Asian markets. Do you see India outperforming or today it was just a one off day where they have and otherwise India doesn’t get too much of a preference in the emerging market basket?
A: It is clear that we have seen a nice rebound in the Indian markets. To me the signals – we have been hearing on the policy side of things have been instrumental for that, but for the big picture we need to move forward few months ahead. The elections are going to be really key here for India's near term outlook. So, it is still a bit of a wait and see mode waiting for this major development in India.
Q: Given the cruciality of these elections and the way things are shaping up one just doesn’t know where things could move from here but how would you advise your clients to be positioned?
A: In the near term we have to be cautious after all the global environment continues to be quite challenging. So, there is no particular reason why India should be insulated from that. But ultimately if everything goes well down the road, we will see a massive turnaround with much more positive signals on the policy framework side. Hopefully we will see a nice rebound in Indian assets after the elections.
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