Global markets are springing up surprises every day. After equities and commodities got hammered since the start of the New Year, markets surged on China’s $60 billion monetary stimulus and European Central Bank’s indication that easy money policy may continue in 2016. Bloomberg TV India caught up with BNP Paribas Securities managing director, Asian Equity Strategist and head of research for India, Manishi Raychaudhuri says Fed actions and pronouncements have been one of the major drivers of capital outflows from emerging markets. Indian markets are getting adversely affected because of the swings in the currency market especially the fears of a sharper Chinese yuan devaluation. While slide in oil prices has a positive impact on Indian economy, it has triggered a sell off by sovereign wealth funds in EMs including India, he explained.

The big factor is the entire correction that we have seen in the last couple of weeks; what do you make up of the weakness in the market out here and do you see that somewhere changing or improving? First of all, what is happening in India is not so much India specific. But it has got everything to do with what is happening in rest of the emerging markets particularly in China. The second point is it is also correlated with what is happening in the currency market. In fact, today it’s almost like the story of a tail wagging the dog.

Currency market has become the determinant of the risk appetite or the risk attitude that investors have in the equity market. We have seen the year beginning with the Chinese Yuan depreciating and that triggered a currency war in the rest of the emerging markets. And as a consequence of that, we saw continued outflows from the emerging market universe.

If you notice the emerging markets funds and Asia ex-Japan funds, between two of them over last six months or so they have got outflows of almost $7-8 billion and that is one of the worst rates of outflows for a long drawn out period that we have seen in recent times. Until and unless the currency markets calms down and we see some degree of visibility about how currencies are likely to behave and as a consequent of that some degree of visibility of outflows stagnating at least or some of them not continuing at this pace, it is very difficult to take a call on the equity market. Having said that there are obviously stocks, sectors and markets, which are trading at very low valuations which would give rise to some short term bounces like what we are seeing today.

Another important variable is the commodity market, particularly oil. So, paradoxically even the oil price decline is treated as a positive for India—it is positive for macro economy of India no doubt—but the contagion effect on the equity market is turning out to be negative because a significant degree of capital invested in equity market also comes from sovereign wealth funds (SWFs), which are in turn correlated to how oil prices do. That contagion is having its negative impact on entire emerging market universe and India is unlikely to be free from that.

There are too many variables we are juggling with right now. We need to see some degree of stability in currency and commodities.

How do you see stability returning to global markets given the variables you have mentioned? Given the fact that they seem to be a little uncertain right now, where and when do you see things stabilising? Now, it’s a million dollar question that investors are searching for. If you notice this round of capital outflows that we are seeing from various emerging markets, there were two major drivers behind that. First is what the Fed has been saying and what they have been doing. In one of my reports had a particular chart, which actually showed since the global financial crisis (GFC) the Fed actions and pronouncements have been one of the major governors of emerging markets flows.

But over last one year or so, there has been a degree of concern about emerging market credit defaults that has crept in.

That is why the flows have been strongly correlated with the variable like emerging market bond index, which is essentially a proxy for the credit risks in emerging markets. I think this question of credit risk is unlikely to get settled any time soon because as far as the declared numbers are concerned we haven’t really seen a serious uptick in this credit defaults.

But one variable could get settled. And that I think is Fed’s attitude. If the Fed turns a little more dovish in the second half of 2016, I think many of these questions about currencies, commodities and capital flows into emerging markets, could be resolved at least temporarily.

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