Christmas is spreading cheer across the world and markets are settling into the festive mood. However, next year could start on a cautious note. Speaking to Bloomberg TV India, IPEplus Advisors CEO Anil Ahuja says emerging markets (EMs) may see a sell-off as easy money dries up.

Markets seem to be settling down as the Christmas cheer spreads across the globe. But what do you feel is going to be the sentiment as we really move into the New Year? Do you see cautiousness continuing or perhaps that risk of trade abating?

I actually think that there is a bit of Santa Claus rally going on right now where funds are going to try and manage their NAVs before the yearend so that they don’t look terrible. But, on an overall basis, I think the risk-off will be the mood going into the next year, and that cannot be avoided. The Fed has raised rates and it has given an indication that they intend to raise them further in the next 12 months. I don’t think people can avoid that kind of signalling and if you follow that signalling through then there will be a reduction in equity in the market place.

Do you see that impacting emerging markets? How do you see the region shaping up going forward?

See, the entire carry trade that has been running over the last seven-eight years is going to be a trade that will face trouble now. So, there was a lot of money that was parked in emerging market (EM) assets, which was being funded by close to zero-cost borrowing. Now, when that borrowing starts to evaporate, people are going to start unwinding that trade and start returning some of the leverage that they have taken. So, I see EM funds continue to see redemptions over the foreseeable future till the rate rise continues. I expect money being pulled out of the EMs because, frankly, they have not given any inherent or intrinsic buying signal. China is slowing down and commodities are slowing down. So why should somebody sitting in a developed world stick their neck out and put money into the EM basket?

Looking at India-dedicated funds, do you see that trend shaping up differently?

Yes, I do because I think India is the only item in the basket which frankly looks better if oil collapses from $40 a barrel to $30 and from $30 to $20. We are not determined materially by the commodity basket. We are continuing to show a 7 per cent-plus growth rate. So we do strike for somebody who is looking from the outside, that India is a clear outlier in that basket. And while the basket may have a problem, I think India should see a positive momentum. Now, we can be better than the rest but that does not mean that the underlying behaviour, which is at a risk-off trend, will not continue.

What is your focus in 2016? Is banking going to be something on your radar?

Banking will be on my radar. I think there are a couple of themes that are clearly playing out — banking, consumer and urbanisation. I am still to figure out how exactly the banks or which banks will react strongly to the way the RBI is coming down on recognising the bad loan problem. We all know that the bad loan problem exists — we have got varying estimates from ₹2-12 lakh crore in all kinds of numbers in between. But, that number is large and that number can’t be solved by the quantum of capital that the Ministry of Finance is indicating that it will inject into the banking system over the next four years, which is some ₹70,000 crore. There is a problem that needs to be solved. But the fact is urbanisation is happening — the consumer demand is strong, so cars are being bought, motorcycles are being bought, home loans are being taken — the composition of the bank book in terms of the loan book is materially changing. Now do we give ourselves enough time for the change to settle in without any disruption or do we cause any disruption in the process? We have seen this happen before.

This story has played out in the early 2000s when a few sectors, specifically steel and shipping, were in deep trouble, but the banking system got a reprieve in terms of dropping interest rates and they were able to bolster their balance sheets by booking some of the profits on the bond side and use it to offset a large chunk of the bad loan issues that they had and smooth through that period.

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