He further added that the Asian markets could be seen peaking out in the post-May period.
While he predicted that the RBI may be approaching the end of its tightening phase, the Chinese authorities may enforce some more tightening.
He further added that India could outperform in the near-term.
Excerpts from exclusive interview with Mark Jolley:
Q: What do you put this recent global strength down to, because end of February-beginning March things were looking quite murky but since than all these markets have rallied quite significantly?
A: I think there are few things going on, but the most important thing is that through the Q1 we have seen quite strong economic data particularly the data relating to China.
If anything, the Chinese economy has been accelerating into the March quarter and the export numbers across the region have been quite strong. I think just the overall economy globally doing quite a bit better than people expected, has reflected in the commodity markets. If you look at the commodity markets all of them have made new highs or adjusting their highs that also is suggesting strong economic growth.
Q: Do you see this strength as temporary or do you think the worst is over for this summer for the global emerging or Asian markets and we may continue to see even higher levels?
A: Our view has always been that the markets would be quite strong in this half year and I think they will continue to be strong for at least another six-eight weeks running up to a peak between May and August.
After that, though the markets might struggle a bit. There are two main reasons for that – first, the global bond markets are also striving to sell off and there were yields rising, reflecting economic strength. Traditionally what we have seen over the last four-five years - when we get bond market selling off; eventually puts pressure back on equity markets.
We have seen the bond markets in Europe yield pushing to new highs for this business cycle. In the US, yields are starting to push back up again and in Japan also. So that’s something to worry, the other thing to worry is that the Chinese authorities are very concerned about their domestic equity market overheating and I would expect in couple of months, we might see some new measures from the Chinese Authorities.
If you go back to February, the initial thing that caused the market to sell off was, the Asia markets in China were down 10% in a day, maybe because of Chinese government mention capital gains tax; and I think that would be very concerned by the strength of the Asian market. I do expect that two months from now or so, they will lose patience. So I think the markets may come under pressure again after the summer.
Q: When you spoke about yields inching up globally, is it an apprehension of yours that maybe rates might harden lead by the US Fed as well in middle of this year, which could suck out some liquidity from the whole, emerging markets equity spectrum?
A: At the moment our house view is that the next move by the Fed would be easy, but of course the money market this year is priced to Fed tightening twice, Fed easing twice and in fact the Fed’s done nothing.
And if we continue to see the economic strength coming through in these economies and we continue to get just niggling inflation concerns, we have an inflation number to add in China next week. Its entirely possible that the bond market in US could swing back to thinking that maybe the next Fed move is tightening and yes that would be something that would impact risk appetite.
Q: What’s the call on India then its started pulling back after fairly long bout of underperformance relative to global markets. Do you think India can outperform for a while or are you worried about this market?
A: One of the reasons why Indian market been under pressure recently has been the fact the Central Bank has been tightening quite aggressively. According to our economists, we are getting to the end of tightening phase in the Indian economy.
And if you look at the way Asian equity markets have performed over the last ten years, typically you get a short-term run of out performance from an equity market, which has had the most aggressive tightening over the last 12 months.
Today that market is India. So I think if the market in India begins to sense the end of a tightening cycle by the RBI, which is clearly what the market’s been reacting to in the last couple of days; I do not see why the Indian markets would now perform short-term over the next month or so.
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