Mark Konyn of CCAM told CNBC-TV18 that investors feel that there is fundamental and structural weakness in India. He believes that market is not yet convinced that additional revenues can be raised sucessfully as hoped by the Union Budget 2013-14.
According to him there are certain sectors, which have been affected more and at this stage. "The investment money in India is loading up and overemphasizing the risk aspect there," he told the channel.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: What are investors talking about the fall that we have seen in China? Is there more pain left in the Chinese equities?
A: Certainly, the markets around China and the region have been very focused on the more recent draft of measures taken by the authorities there to try and curb speculation in the property market. The property developers and the counters would have been hit hard if the sentiment had not reverberated through the equity market as a whole and certainly been picked up as a theme in Hong Kong and elsewhere in the region.
I think there is a sense in respect of where China is in its current economic cycle. That perhaps they loosened policy a little bit too much and too early.
Q: What is the reading from the US itself? About USD 85 billion of spending cuts have been allowed. Is this going to have a ripple effect on the liquidity that comes out of the US at all?
A: It is a very key point. Markets at the moment are struggling to take a lead without the US markets being open. There are two aspects here. Firstly, the US seems to have shrugged this off a little bit so far. Although a sequestration, there are proposed spending cuts there seems to be a view that USD 85 billion out of full Budget of USD 15 trillion can be digested without disrupting the economy too heavily and too broadly.
Obviously, there are certain sectors which have been affected more. I think at this stage the investment money in India is probably loading up a little bit and overemphasizing the risk aspect there. Once the US comes online the investors are going to be more focused on the jobs numbers that we have coming out of US at the end of the week.
Q: What is your own sense? Will this have an impact that will be negative? Even at USD 85 billion it would be 5 percent of the GDP.
A: These estimates we suggest could knock half a point of growth at worst. The general view at the moment is though. That whether or not the full extent of these cuts holds depends on what happens between now and the point where they are actually being implemented. So, we have probably got another month or so before the tides hit the road and the severe cuts start to take effect.
There is half a hope that some restitution will be made and the full extent of the cuts is not imposed. However, regardless I think in the broader context it is unfortunate. It is again another symptom of the rather fractured political process that is underway in the US. Overall, the general consensus says that the economy is big enough to shoulder these cuts, even if they are extended to the full amount.
In terms of how that impacts liquidity, which I think relates the first question. We did see some concern in February when the Federal Open Market Committee (FOMC) meeting notes were published. There were some concerns that consensus behind the current quantitative easing will start to be low.
However, that was reaffirmed by Bernanke in his address. So, the concern about the continued approach and the focus on the employment position and the strength of the economy still holds. That means a commitment to be out there buying those securities is still very much in place. This means the funds that are flowing through as a result of the action will still continue.
Q: In your conversation with investors have they changed their view on India post the Budget?
A: They are still digesting to a large extent. There is a bit of déjà vu with some of the issues that were on the table last year. There is still a sense though that there is fundamental and structural weakness.
The market is not yet convinced that the additional revenues can be raised in quite the way that is being hoped. If there is any backsliding on this of course it will impact flows. Therefore, be expressed in the currency at a time when as we know currency is very much key attribute that is being regarded globally across a number of countries.
Q: According to current understanding and reckoning you do not see any change in fund flows on the back of sequestration?
A: The sense is it will be digested pretty quickly. Of course it is contingent on the economy continuing to make progress. As we know the retail sector has been a little bit weak. We had tax increase, tax refunds, higher gasoline prices. These are all expected to impact the retail sector in the US. We will likely to see that flowing through in terms of job numbers.
So, the general consensus is about a 150,000 new jobs created in February which will be published on Friday and that is down from January’s actual 157,000. So, still within the same range, if we do get a number there that will show that the economy is continuing to improve, albeit very, very slowly. This means that the Fed will keep its foot on the gas and continue its purchase program, which will allow funds to flow.
In the short-term of course although we did see strong momentum and re-risking of portfolios, globally the disturbances that we have had around sequestration and more importantly perhaps around the issues in China, the eurozone and the Italian election has affected sentiment overall. That reallocation to risk has probably been put on hold in the short-term.