Emerging markets have seen a significant fall in the past few days, however, it is still too early to buy EMs believes Hans Goetti, chief investment officer, Banque Internationale A Luxembourg.
Speaking to CNBC-TV18’s Ekta Batra, Goetti says that most EMs have a fundamental issue of inflation and with the Fed tapering its monetary stimulus program, the dollar is likely to get stronger and interest rates are likely to be raised, thereby leading to a weakness in the markets.
Also read: Broader EM jitters to hold India back in near-term: AmbitGoetti, however, is bullish on India and ranks it over China in his pecking order.
“We have not seen aggressive outflows out of India, so India would be one of our top choices. The other one is China, on valuation grounds it looks attractive to us but China has different issues to deal with of course,” he adds.
Below is the edited transcript of the interview.
Ekta: There has been some recovery which took place in the US markets yesterday, but overall do you think that 2014 will be the year where the US market equity run that we saw in 2013 gets a bit undone?
A: We do expect positive returns there, but nothing on the scale of what we had in 2012-2013. We had a tremendous expansion in the price-earnings ratio last year with relatively moderate earnings growth and it is going to be opposite this year.
Earnings growth will probably pick up and price earnings ratio should come down as the Fed moves towards policy normalisation which ultimately will result in higher long-term interest rates.
Anuj: Would you use this emerging market weakness to buy, especially a market like India?
A: We think it is a bit too early. Emerging markets do have fundamental issues, one of them is inflation. This is pretty much across the board and now with the Fed going back to a more normalised policy, we are not quite there yet, but we are on the path. This means a stronger dollar, higher interest rates and some of the fundamental issues will have to be addressed. EMs cannot be put all in one basket.
India is different from Turkey for instance, so there are opportunities in certain markets, but overall as an asset class we are underweight emerging markets right now.
Ekta: What is taking place within the emerging market currency space? We have not seen as much volatility come in to the Asian currencies such as the Indonesian rupiah as opposed to what is happening in Latin American and East European countries. Is there some amount of fund outflow which has now shifted towards those countries as opposed to the Fragile Five and maybe the worst is over for the Fragile Five?
A: I am not sure whether the worst is over for the Fragile Five, but there are improvements in some countries, for instance Indonesia has seen an improvement in the current account deficit (CAD) at the margin at least. So, we have to differentiate. We would also probably look at countries which are commodity producers which could probably have a tough time as long as the Chinese economy is slowing down. So you have to differentiate from country to country, but as an asset class for international investors our preference is with the developed markets.
Anuj: Once this fall is over what would be your top three or four picks? What would be your pecking order in emerging markets?
A: I would think that India would be close to the top of the list simply because a lot of bad news has already been discounted. There are some hopes that the political landscape will change into a more favourable picture, that is at least what the business community expects.
At some point inflation will come down if the central bank keeps raising interest rates, so with lower inflation we will probably have a pick up in growth and at some point, the resurgence of an investment cycle and that is what we are waiting for.
We are probably still quite far away from that, but we have not seen aggressive outflows out of India, so India would be one of our top choices. The other one is China, on valuation grounds it looks attractive to us but China has different issues to deal with of course.
Ekta: What about the commodity space? We have been talking about equities continuously. How would you approach gold as an asset class in terms of investment in 2014 and secondly what is taking place with Brent crude, because that seems to be slowly sliding lower?A: Gold first - we are not looking at gold as a commodity, we are looking at gold as a currency more than anything else and we have seen obviously a bull market which ended in 2011. Now we have entered a bear market, but the question remains whether gold can hold above the critical level of USD 1,180. If it moves below that we have some downside risk to USD 1,000, but that is not our base case.We think gold at least will go sideways this year, we do not expect too much upside, but in the long run with central banks continuously on the path of Quantitative Easing (QE) and inflation picking up in some countries, gold will probably find its lustre again, but it is probably be coming more in the later half of 2014 or 2015. As far as oil is concerned we think that oil probably could move higher. It is pretty much in a trading range. It has been in a trading range for quite sometime. It is well supported around USD 90 and probably the upper end will be about USD 110-115, so we expect it to move within that band over the next 12 months.
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