Chairman and CEO of Lloyd George Management, Robert Lloyd George says that the sentiment is positive, but markets are still not out of the woods. Fundamentally and technically, one may see more of a downside in emerging markets.
He also said that there are current account deficit concerns for India and other emerging markets. However, more downside is likely in India, valuations are a concern.
He added that the Bank of Japan rate hike might affect liquidity in India, and there will be reduced exposure in India since it has moved to Hong Kong and Singapore.
Excerpts from CNBC - TV18's exclusive interview with Robert Lloyd George:
What did you make of what the Fed said yesterday and what is your call on emerging markets including India now?
I think there is definitely an improvement in sentiment compared to the last couple of months. However I think it maybe too soon to say we are out of the woods and in a way the real question is about valuations.
Do you think what we have seen last night and what we could see for the next couple of days is no more than a relief rally because the market had got overly skeptical or circumspect about what the Fed may say?
Yes, I think there is a relief rally but I think technically and fundamentally we may have further downside because of the high valuation. There will continue to be pressure on the current account and on the currency because of the deficit on the current account balance. This is a picture, which we see globally in emerging markets.
We have seen what happened in Turkey, South Africa, as well as pressure on New Zealand for different reasons, but mainly it has been because of the rising current account deficits and mainly because of oil imports. That is something that investors have to keep at the back of their mind because it will affect the emerging markets.
Compared to the Asian crisis which we experienced out here in East Asia in 1997-98 it is not nearly as severe, so generally the financial conditions are much more favourable, our balance sheets are stronger.
Countries have not become so indebted but I think in the specific case of India there is still perhaps some more downside before things even out.
What do you expect to see in terms of liquidity inflow into emerging market?
Liquidity is ofcourse the guiding theme of the last two months with the risk aversions having risen. We have had this contraction in liquidity, which really started in Tokyo. What we have highlighted in our investment strategy is that the Bank of Japan's move to end the quantitative easing and restrict the credit somewhat more.
Now we see the rates in yen rising to one per cent after almost zero per cent interest rates for a long time. This is a big change and it has affected all the overseas markets and I think India maybe particularly affected by that. But when you consider it there was some estimated 4-5 billion Japanese retail money, which came into the Indian capital markets in the last two years.
Tactically what would you do with your exposure into India at this point?
We still have a substantial long position so our stance in dedicated India funds, and in our regional funds has become more cautious. We have reduced some of the India exposure in favour of Hong Kong, Singapore and some of the lower PE and higher dividend yield market. I think that investors will have to keep in mind this question of dividend yield and their return and also currency risks.
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