Rupee to stabilise, emerging markets cheap: Credit Suisse

Developed markets are beginning to look expensive after the recent rally, and emerging markets appear cheaper in comparison, says Robert Parker of Credit Suisse AMC.

On the whole, he expects the bull market in global equities to continue, and does not see the trend reversing anytime soon.

But the outperformers will clearly be emerging markets, he says.

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“Some of the very significant gains we have seen in markets like US and Japan are not going to be repeated. We will see sideways trade in those markets and simultaneously outperformance in Europe, emerging markets and sectors like realty and infrastructure,” he said.

He is not as bullish on emerging markets’ bonds, though he says the macro-economic environment is beginning to calm down.

In an interview to CNBC-TV18, Parker says India’s GDP growth will start improving only from April next calendar.

“I think period of poor growth for India is behind us and we will see better numbers,” he says.

According to Parker, US macro-indicators point to acceleration in the economy, and he expects the Federal Reserve to start tapering in January.

Currencies of India and Indonesia, which saw maximum volatility over the past few months, will stabiles at current levels, Parker says.

Below is the verbatim transcript of Robert Parker's interview on CNBC-TV18

Q: Global equity markets have been stable of late with intermittent bouts of volatility, how are you positioned in equities, both developed markets (DMs) and emerging markets (EMs)?

A: We go through cycles and phases where markets are reasonably easy to analyse and I know this is easy to say on perfect hindsight but if one looks back one-two years, we've had a very strong equity bull market except in certain EMs that have underperformed DMs. But the trend for some years has been for strong global equity markets.

We are now reaching a stage where a number of markets mostly the DMs particularly US, valuations are starting to look stretched. So, we are going from a phase where equity markets globally were easy to analyse to a phase where they are much more difficult to analyse. As investors we need to be much more selective and careful in terms of market positioning.

There are a number of themes like the global bond yields will rise slowly and the bond yields at least in DMs are unattractive. Money markets are also very unattractive. Another big theme is EMs today are cheap relative to DMs and that is actually not surprising when most of this year EMs have underperformed DMs.

The two top performing markets worldwide have been US and Japan. So when we look at where money flows go - I would highlight 3 themes- Theme 1: Money flow into EMs over next 6-12 months because they have underperformed DMs and are cheap and investors are too negative on the economic and corporate earnings outlook for EMs.

I think theme 2 is into Europe relative to US and Japan and the background to that theme is that investors still don’t trust EU recovery and are skeptical that the crisis is over but my view is that it is over.

Q: The trade for the year has been long developed markets and short EMs and gold. Do you think going forward EMs can play catch-up in 2014 if this starts to attract the kind of flows they have done over the last two-three months?

A: EMs can certainly play catch up. If you look at macro economic theme for 2014, for the first time in many years and that is like 10 years plus, the macro economic theme now looks much calmer.

There is a high probability that we'll get US growth at 2.5 percent plus, German growth more than 2 percent, the EU out of crisis, Japanese growth close to 3 percent, Chinese growth will hold at 7.5 percent, Indian growth has been lackluster over the last three-six months but as we go into 2014, we will see some improvement in Indian growth despite tougher monetary environment. There is a good probability going into second quarter of next year, Indian growth could be back well above 5 percent.

So macro economic environment at a time when global inflation will stay low or come lower is quite positive. I don't see a major reversal in global equity market. I feel some significant gains in markets like US and Japan will not be repeated. We will see sideways trade in those markets and simultaneously outperformance in Europe, EMs and sectors like realty and infrastructure.

Q: How do you stand on India versus China, in light of Chinese reforms? Do you see any possibility of China outperforming India?

A: I am afraid I quite like both markets. Both markets have underperformed, though china has unperformed more than India. Although the news flow has been somewhat opaque, it looks likely that the next policy round in China will have a positive impact on the economy. They can hold 7.5 percent growth and the only thing that is somewhat worrying for them is geopolitical risk and the fact that they have announced this new East China air defensive zone. The tension between Japan and China could escalate and have a negative impact on the markets.

So from the economic side its positive, political side a word of caution. Having been very cautious on Indian market this year, I consistently said the Indian market would recover from October onwards. The outlook for Indian market and period of poor growth is behind us and we will see better numbers.

What happens to oil prices is important for India and we need to watch very carefully the situation on negotiations with Iran. The news over last few days is negative for global oil prices but positive for global markets in particular India.