Global markets have now become incredibly sensitive to marginal changes in economic growth data, believes Richard Gibbs, global head, Macquarie Securities.
"US retail sales data disappointed. Chinese GDP was below expectations at 7.7 percent. Also, gold falling is based around the fact that gold is not now seen as an imperative to hedge against possible destruction of national currencies or exchange rates as it as at the beginning of the euro crisis," he said in an interview to CNBC-TV18.
Meanwhile, he added that one may continue to see exchange traded funds (ETFs) being allocated to developed markets.
On India, Gibbs feels the Indian government needs to become very ambitious about the implementation of structural reforms to make the stock market attractive.
Below is the edited transcript of Gibbs’ interview to CNBC-TV18.
Q: The big development is the sharp crackdown in global commodities- gold and of course crude over the last few weeks. How have you read it? What kind of ramifications does it have for rather risky asset classes like emerging markets (EMs)?
A: From last Friday, the market became very sensitive to any kind of shocks or disappointment on the growth side globally and within national jurisdiction. Of course the retail sales data in the United States disappointed and that really led us into a weekend where people were starting to wring their hands about the durability of recoveries in the global economy. Chinese GDP today has obviously disappointed a lot of people in relation to the consolidation from 7.9 percent to 7.7 percent. So, we have got a global market that is incredibly sensitive to marginal changes in growth. The growth drivers in the global economy are seeing a bit of a return to some risk-off plays. It is also seeing gold falling based around the fact that gold is not seen as an imperative to hedge against possible destruction of national currencies or exchange rates as it was at the beginning of the euro crisis.
Q: Data from this part of the world seems to suggest that there is an outflow that has begun especially for some of these emerging market exchange-traded fund (ETF) type products. Is that something you are seeing as well? That a pullout of liquidity has started for some of these ETFs?
A: Anything that has a fair amount of liquidity attached, tends to be the first one to be sold as liquidity or funds are moved out. Obviously the ETFs do have a superior amount of liquidity attached to them as an instrument rather than a direct exposure to the stock, you. So, I think we continue to see that sell down across the more liquid ETF securities as we see people starting to cut back in terms of their leverage and their exposure to the risk front.
Q: The counterargument seems to be how awash the system is with liquidity both from the Bank of Japan (BoJ) and the Fed and that may keep all votes afloat. Would you agree with that or do you think in the near-term money is probably moving towards markets like Japan and the US to the detriment of markets like India?
A: It is a very, very good point and it is one that at times perplexes me and frustrates me as I move around the world, particularly in the United States. There is an enormous amount of liquidity still domiciled there in the United States. The central banks' balance sheet activities, particularly the BoJ has been adding to that liquidity.
So, it is really now a matter of stability of the flows. Liquidity is the important thing or the instability of those flows and that is where emerging markets (EMs) really get caught up in the whole maelstrom of these global capital shifts. They are at the margin really, because of the lack of depth and liquidity in many of their securities markets. There really isn’t any shortage of global liquidity, it is really about the allocation, distribution and the smoothness of the flows of that liquidity that really is going to determine what we see in relation to market performance going forward.
Q: Where does that leave a market like India where performance has been lacking from the start of this year? We are probably one of the worst performers so far. Our macros and micros do not seem to be promising that much at least in the near-term. How would you rate India in that context?
A: There are two options or potentials for recovery in the Indian market. The first one is to move to a dramatically oversold position so that we then start to see global capital allocators coming in looking for those opportunities at very attractive entry-level prices. The second one, is for the government to really become very ambitious about the implementation of its structural reform package or policies. If that was to happen, then that sends some positive shocks through the Indian market. In the absence of either of those two influences, I suspect that we continue to get a steady drift off in terms of market performance for the Indian market.
Q: How do you think the currency game will play out? That has had a fair amount of impact on equity markets, the kind of gyrations we have seen on currencies globally?
A: I really think G20 and Japan are in the centre of this debate. If the yen-dollar exchange rate does move to a weak point of 110 against the US dollar, then I think we really are going to see the spectre of those currency woes, exchange rate woes being elevated particularly in the Asia-Pacific region. It will also hinge on what South Korea does in relation to its central bank. They are really under pressure with the weakness that we have seen to date in the Yen and so if they decide to counter that by implementing their own aggressive policy of quantitative easing, then that adds to the exchange rate pressures across the Asian region. So, it is still a very open agenda at the moment and it is one where you cannot rule out the risk of retaliatory action against the perceptions of competitive devaluation.