There is a big question mark over emerging market assets: Nizam Idris, Macquarie Bank

In a chat with ET Now, Nizam Idris, Head of Strategy, Macquarie Bank, says global bonds are down and that could lead to selloff in emerging market bonds as well. Edited excerpts

ET Now: Trying to make sense firstly of crude and this dip below $40. Would you read too much into this? Does it seem like $40 could be the new normal or do you think this is just a little bit of aberration because of oversupply concerns?

Nizam Idris: I guess you are referring to the WTI which has fallen below $40. I think both WTI and Brent crude have actually fallen. I do not know about 20% off their previous peak. That could be considered as a bear market and for me it is a reflection of two things. As soon as oil price went up above $50, there was significant pumping in of new supply but demand has not actually picked up in any meaningful way and post Brexit, there was fear that demand will continue to fall. So I think this could be the new normal as you should not expect Brent or WTI prices to rebound significantly from here in the near term.

ET Now: Let us talk about the Japanese stimulus commitment. One is getting a sense that the Japanese central bank despite being desperate to stroke growth higher, have not increased their total commitment towards a stimulus?

Nizam Idris: Yes, that was an important move in my view. I think it disappointed most of the market in that the commitment that they announced last Friday was a mere three trillion more purchases in ETFs. For me that does not do the trick. Really what they need is significant more purchases of JGBs and the expectation was high because the government was expected to pump in new stimulus package which generally would mean more issuance JGBs for the BoJ to buy.

So I think it has been a disappointment from Japan on both perspectives. Meanwhile, the BoJ did not plan to buy JGBs anyway. So in total, the net effect is that the yen has strengthened. Now I think the other effect which the market is not focussing on is the fact that the yields have actually rebounded sharply in Japan. It was minus 0.3% 10-year only last week. They are now close to 0%. So it has gone up quite a lot. If you recall in 2013, when there was a big selloff in JGBs, the Emerging Market currencies weakened. Emerging market currencies weakened around about 5% in 2013 because of that selloff in JGBs which spread globally. Now the question is whether today’s selloff will spread as well, I am slightly concerned.

ET Now: Just to stretch that point forward what is that you are making of the emerging market currency basket because right now what we are seeing is strength and that is matching up to the dollar strength as well, does it seem like be it equities or currencies the game is now within the emerging market pack?
Nizam Idris: I think that is the complacent view. It has been strong emerging market currencies over the last few weeks. Even post Brexit, you would say that there were some inflows. So the bad news of Brexit has actually led to inflows into emerging markets.

The flow I thought was explained by the expectation of more money being pumped into the global financial system from easier monetary policy globally, that has not happened and yet emerging market currencies have actually remained pretty strong. So I think it is now at a very fragile situation where we have not had any new money being pumped into the system and number two, we are beginning to see global bonds market being sold. That will eventually lead to a selloff in emerging market bonds, emerging market assets, I think that is a big question for now.

Again, if I were to refer to 2013 when there was a big selloff in global bonds markets. Then EM currencies eventually caught up with that selloff, this could be a repeat of that. I am for now very cautious because there is no real good news, there is no real money being pumped into the system. Emerging market currencies have appreciated a little bit too much in my view.

ET Now: What is your top currency trade right now, what is that you would propose?

Nizam Idris: In the very short term I continue to like the US dollar and the yen for obvious reasons. There is no stimulus out of Japan and therefore I think the yen could appreciate. There could also be risk off where both these two currencies can appreciate as well. So I would like to buy dollar against Korean won, for example, dollar against Singapore dollar, dollar against Malaysian Ringgit, now dollar against the rupee. We could get some domestic positive which may support the rupee somewhat. The GST which could be announced today, could be passed through the Upper House today and may actually be seen as a positive so there could be some support for the rupee from there.