Investors worried China will start currency war: JPM AMC

The tumultuous run witnessed in global markets recently threatens to continue till China's yuan currency (also called the renminbi) stabilises, says Ian Hui of JPMorgan Asset Management.

"Markets are likely to go down further till the China fix stops," Hui told CNBC-TV18 in an interview, referring to the country's recent decision to move to a semi-floating "fixing" regime for its currency, which has since started falling in light of the economic slowdown witnessed there.

Many observers, however, say China's decision to float its currency has more to do with making it fall rather than liberalizing it. "Investors are worried China will start a currency trade war," Hui said, indicating that if the world's largest exporter is intentionally devaluing its currency to gain an export advantage, others may also follow suit.

But despite that, Hui still favours volatile equities over "safer" bonds, saying he is positive on developed market stocks. Within the emerging market (EM) basket, he is positive on India, saying he still has "reform hopes" from the Indian government.Below is the verbatim transcript of Ian Hui's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What is the sense, you are going to see EM equities were down much more, are you prepared for 5-6 percent fall?A: Definitely quite a bit of uncertainty over the emerging markets. I think it will only start to stabilise when we see china start to stabilise, a lot of the worries, a lot of psychological factors are floating around what is happening in China right now. Whether it is going to be, as you mentioned, a 5 percent fall or not, I think that is pretty hard to say but in my view, it would probably go down further as long as China is still looking questionable and uncertain at the moment.Latha: A few days of the Chinese Yuan not getting a fixed lower, is that what you would look at, would you look at their stock markets at all, what are the markets you would look at?A: As I mentioned, definitely if the renminbi stays steady, I think we will see a bit more uncertainty. I think the economy numbers were a bit weak. That was somewhat expected. What got people worried were that the continued depreciation of the renminbi. A lot of investors are worried that this will create a currency trade war despite what Chinese government officials have said like they are going to move the renminbi against the basket of currencies instead of just against the US dollar -- since we have seen the US dollar appreciate, a lot of people did expect or should expect the renminbi to depreciate.However, I think most people are still concerned about the possibility of currency volatility and other things. So if the renminbi does steady and we don’t see any sort of continued move downwards of the renminibi then I think that should be a bit of better news. Other news besides China, they might look forward -- of course China is dominating the news right now at the moment. So I think unless there is very good news out of the other developed markets such as US or Europe, I think China is still probably going to rule the headlines for the moment.Sonia: So what should the asset allocation strategy be for investors hereon, would you suggest moving out of equities and raising cash levels or even moving into safer havens like government bonds or what would your advice be?A: Our advice is still equities over bonds at the moment we are still more positive in the long-term on equities. US is still growing, Europe is still growing well, we are still positive on developed markets over emerging markets. I think most of the volatility -- it should be just a short-term issue. We are still more positive on equities over bonds and cash. So yes, I do agree that it is quite a worry but we don’t always advise our investors to quickly switch in and out of assets as they were tend to be quite poor of market timing if we look at history of how most retail investors' view of market timing, so still in the long-term equities over the bond and cash.Latha: On the contrary, the strong jobs data will perhaps pull more money into developed market equities. How do you see therefore the dollar behaving, do you see it strengthening back to that 99-100 levels, the DXY, how should we interpret that strong jobs data?A: So, obviously quite a bit of strong jobs data in for the US. Last week that might suggest of greater chance of a rate hike for the US going forward. We do expect the US dollar to go up from what it has so far. Over the last year I believe, we have seen appreciation of the US quite significantly. We still do expect that continue probably not quite as quick as it has over the last years ever since the Fed made some signals that there will be an easy monetary policy in the US. I do expect that to go up and not quite as fast as it has over the last few years. Obviously though, we have better US jobs data, we still do expect probably one rate rise per quarter, so three-four rate rises for the US this year. That is probably going to drive the US dollar up and it is still probably better news for the US economy.Sonia: You mentioned that you prefer developed markets over emerging markets, we have seen emerging market equity funds see 10 straight weeks of outflows. Do you expect more selling pressure especially in markets like India?A: I do expect more volatility especially with people uncertain of how China is going. So I do expect more outflows to continue while people worry about what is going to happen and that will most likely be the situation. In emerging markets though, relative performance wise compared to what other markets are doing, we still do have quite a number of reform hopes, India is quite a bit of less reliant of what is happening of China, less reliant of what is happening with trade story. So relatively, India still a fairly positive story within the emerging markets.Latha: One thought that India may not see so much selling because it is a user of global commodities and should therefore benefit, nevertheless we have seen fairly strong over USD 100 million outflows over the past two-three days, will that continue, will that ebb away?A: As I mentioned, India is a bit less reliant on what most of the worries floating around China and commodities are but I think investors worries about what is happening with the renminbi, possible issues with emerging market currencies, possible issues with the trade even though India as I mentioned is a bit less reliant on that. It is still going to weigh down on what is happening in India. However, in spite of that, I am still relatively strongly convicted that India will be better out of emerging market countries.