Slowdown in US to reduce flows to EMs: Dariusz Kowalczyk

Though Indian markets are experiencing huge volatility, Dariusz Kowalczyk, Senior Investment Strategist, CFC Group is overweight on India compared to the other countries in the region. That is because he feels India is relatively cheap on forward-looking price earning ratios given the long-term growth potential for the country.

Kowalczyk gives his views on what's happening in the Indian as well as other emerging markets.

Excerpts from CNBC-TV18's exclusive interview with Dariusz Kowalczyk:

Q: How much of a concern is this slowdown that you have seen in the numbers that have come in overnight from the US and this much talked about Yen carry trade now that the yen has actually gone to about 115 or thereabouts?

A: We are increasingly concerned over the out of US GDP growth, retail sales numbers, that came out yesterday, which were weak.

But they are just symptoms of some problems in the US that are related to mortgages; yesterday’s mortgages delinquency data out of the US showed that increasing number of home buyers are completely not paying mortgages, which means that the data cannot afford it and if they cannot afford the mortgages, how can they afford to consume?

Besides the problems in the mortgage markets may mean more restrictive lending practices by US banks and this will slowdown US growth. So it is increasingly likely that the economy across the Pacific will experience a sharper growth slowdown than we thought.

Q: Talk about the interest rate scenario on both of these economies because that would be very crucial to the way emerging market flows pan out over the next year or so.

A: Yes, it is true and as the US economy is going to slow, so will global growth because so many countries around the world, especially emerging markets and their GDP expansion are dependent on exports to the US.

If US consumers do not consume that much, how can these exports continue to increase? So with the global growth slowing, our risk aversion will increase and flows into emerging markets will also subside.

Q: How you see yen carry trade unwinding? Do you have anecdotal evidence that suggests that with this appreciation in the Yen, we are seeing actually a little bit of yen carry trade unwinding impacting the fall?

A: There is a lot of unwinding when you look at the data out of the US from the Chicago Mercantile Exchange. The latest data shows that in the week ending last Tuesday, half of the remaining carry trade has been unwound. So this is a huge number and it simply says that if these are the investors, who had a higher leverage with hedge funds, there is no risk ahead and are trying to limit exposure to risk assets sort of equities and commodities, which are financed by cheap borrowing in the yen. and their buying bets again to pay the broad fund.

So this is just a confirmation of the broader picture of risk aversion that this is going to continue to hit equity markets in the near-term.

Q: What is your view on India in the entire group of emerging markets?

A: Unfortunately, nobody will be safe from increased risk aversion and outflow of front capital from emerging markets and India will suffer with everybody else. However, a relative to other Asian markets, I felt that India is relatively cheap on forward looking price earning ratios given the long-term growth potential for the country. So I would be overweight on India compared to the other countries in the region.