Emerging markets are looking oversold after the bruising slide over the last couple of weeks, says Mark Matthews of Bank Julius Baer.He says a relief rally is on the cards and the immediate trigger will be the US Federal Reserve's decision on interest rates next week.Matthews says he is not sure if the relief rally can sustain. Factors like the macro data in China, and for India, the impending Bihar elections will influence sentiment, he says. Below is the transcript of Mark Matthews' interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Do you think that the markets have adequately discounted the coming slowdown from China or are we going to see the market royal more because of China?
A: Those two questions are distinct and so absolutely the emerging markets including China have become very oversold and very undervalued as a consequence of China primarily but also the fall in commodity prices and the rise in the dollar.
Chinese economy is the second largest economy in the world. It shouldn't be growing at 10 percent; it really shouldn't be growing at 7 percent either. It is just too much. So we know it is going to slowdown probably to around 5 percent over the next few years which is still by the way an ad vulnerable growth rate by any measure. However, it is entirely necessary as they shift the focus of their economy from investments in manufacturing and exports to the service sector and more domestic led economy. But I would just say that China is still going to add more global growth this year than any other country in the world. So I do not think we should be pointing fingers at China, the way most people are right now.
Latha: Not because of pointing fingers. What I am asking you is whether markets have adequately discounted. We know that East Asia will have a problem because they trade with China and today we got numbers that China has imported 14 percent less than what it did a year ago but have the market discounted that fall or are emerging markets going to be hated and sold into much more in the remaining part of 2015?
A: Over the last 12 months foreigners have sold over a trillion dollars of emerging market equities which is pretty close to record high over that period of time. So yes, they are oversold, yes, they are undervalued. Now going forward its tricky. I think the major catalyst will be the Federal Reserve, when it meets next Thursday. If they announce their raising rates; I think we get a big relief rally across the board including emerging markets. The sustainability of that relief rally will depend on other factors like China, like the elections in Bihar, like what happens to Apple. So there are lot of other factors in the world floating around but if we can get the first Fed rate hike out of the way and it's a good chance that it's going to happen by Thursday next week, so that will provide a solid foundation for the markets to rebuild.
Sonia: How are you approaching India now? It is down about 8 percent this year already, fat from the optimistic levels that we started off the year with. Is this a time to be putting in fresh money?
A: I think a lot can happen between now and next Thursday. So I prefer to get closer to the date of the Fed meeting but I do anticipate quite a solid relief rally in emerging markets including India. So I would probably look to be adding around Tuesday of next week?
Latha: Would you say the rupee seen its bottom for the moment?
A: Currency is a different kettle of fish. I hesitate to say that there is a bottom there. I do not have the same conviction as I do on the equities.
Latha: What about the Indian rate situation. It is a unanimous view that at least one rate cut of 25 bps comes on September 29. Would you expect more and therefore does India become a buy because of the rate scene?
A: Possibly. To put it in context of your earlier question, if the Fed raises rates and the RBI cuts rates then in that you would expect that currency should go down more. Governor Rajan in Jackson Hole was pretty straightforward about the idea that rates could and will come down further. However, I do not have a binary view, maybe they cut rates maybe they won't. I do not think it matters that much.
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