Rate hike uncertainty, China‘s PMI pinching market: SocGen

Emerging market currencies are still vulnerable to further weakness, says Guy Stear, Head of Credit Research and Emerging Markets Strategy of Societe Generale."If you look at things like the real effective exchange rates over a longer period of time, the emerging market currencies from that perspective do have room to continue to go down," he tells CNBC-TV18.He says that investors jittery about the US Federal Reserve possibly hiking rates this month itself despite the turmoil in global markets.Meanwhile, Sarah Hewin, senior economist, Standard Chartered says the biggest worry for the market are concerns on China’s economy post the release of unduly weak PMI numbers. Calling ‘India outperforming China’ a compelling tale, she says the Indian growth story is intact, adding that the firm is cautious of economic growth outlook for the next year and is recognising the external headwinds for agricultural growth.Below is the transcript of Guy Stear and Sarah Hewin’s interview with Nigel D’souza and Sumaira Abidi on CNBC-TV18.Nigel: What exactly is causing this fall? We had the Chinese flash purchase managers’ index (PMI) data that came in August. On that day itself, we saw the US markets sell-off and today we got the official PMI data and yet again, the US markets are indicating we like to start off with a cut of two percent. Are you attributing this entire fall to the Chinese data itself?Stear: It is still a combination of two concerns. The first is the weakness that we are seeing continued out of China as you mentioned, the PMI figures have been generally soft. They were not actually worse than the expectations so, people were primes for figures but they were not good news. The second thing is that people are still absorbing the news we had out of Jackson Hole over the weekend where the Fed officials made it quite clear that they are making policy with respect to what is going on with the US domestically and not for the entire world. What they are seeing in terms of the US domestically is an economy which is doing well and where they feel that economy could probably deal with higher interest rates. So, I think it is a combination of the fact that the rest of the world in particular the emerging market world is under some pressure and what will add to the pressure would be higher interest rates from the US. And out of Jackson Hole that the conclusion people take that the hawks were dominating in Jackson Hole. So, it is really after Monday which was fairly quiet because London was closed, we are coming back in and everybody is back in and dealing with the conundrum of these two very different forces.Sumaira: So, you think this Fed commentary has the potential to actually take emerging markets much lower from here and if so, how much lower could we be staring at?Stear: There are a number of areas in emerging markets which do have room to move lower. What we have seen since the beginning of the year is that most of the focus has been pressure on the currencies. However, if you look at things like the real effective exchange rates over a longer period of time, the emerging market currencies from that perspective do have room to continue to go down. And then if you look from currency markets to other things like corporate bonds in emerging markets, dollar denominated corporate bonds, spreads are wider. They are definitely wider. They are back to close to the levels we have seen at the beginning of 2014. But at the same time, they are nowhere near the wide levels we are seeing the years like 2011-2012 or certainly 2008-2009.So, in this sense it is the corporate bond markets that have room to play catch-up with currency markets which have generally led the weakness.Sumaira: It must be a pretty down day actually in Europe because all the European indices have opened with cuts of about two and half odd percent a piece. What is it do you think which is the biggest worry for the market this morning?Hewin: We are seeing another bout of risk aversion on concern about China’s economy. We seem obviously some very volatile markets. But clearly, the surveys from China that we saw overnight have reinforced some concerns about a sharper economic slowdown. I think your previous correspondent was correct in saying that we have to also be aware that there are some positive signs in China, but the question mark is over whether the manufacturing PMI was unduly weak as a result of particularly affected biases to help pollution ahead of this week’s military parade. So, the mood certainly in Europe is not great. But that generally relates to what is happening globally rather than particular concerns about the domestic situation. We have obviously had some market PMI data for Europe as well but marginally softer than expected overall. But again, Germany currently is a little bit stronger on the manufacturing side than expected and unemployment continuing to fall in Germany. So, the macron data that we see within the Euro area to us still points to a reasonable recovery and no cause for alarm.Nigel: Then from the emerging market basket, how do you rate the Indian markets? Do you expect us to be relative outperformers, simply because that is what the consensus has been stating?A: We have lots of focus on India outperforming China and that is quite a compelling story. I mean we are little bit more cautious maybe for next year in terms of the economic outlook. We had a pretty punchy growth forecast which we have marginally shaved down for next year. But still, looking at a very solid rate of growth well over 7-7.3 percent. And that is really recognising that there are external headwinds that are going to take some of the momentum out of the Indian economy and also recognising agricultural growth. But overall, the Indian story is still pretty good and there certainly has not been such focus as there has been on what is happening in China.