Feb 27, 2013 01:55 PM IST | Source: CNBC-TV18

Expect more fiscal tightening in the US: Eastspring Invest

Nicholas Ferres of Eastspring Investments expects Italy to go back for another election and also sees further fiscal tightening in US.

Indian Stock indices dropped yesterday on broad-based selling and negative global cues. While Nifty closed at 5,807, down 48 points (0.81%) and the Sensex touched 19,180, a fall of 152 points (0.78%).

Uncertainty about the outcome of the Italian elections sent fears of a fresh crisis in Europe, which led to fall in US as well as Asian markets.

In an exclusive chat with CNBC TV18, Nicholas Ferres of Eastspring Investments said that recent news flow from both US and Europe is worrisome. He expects Italy to go back for another election and also sees further fiscal tightening in US.

Below is the verbatim transcript of the interview  

Q: What will you really watch out for in Europe? Should one scenario be that the two major parties will come together or will the more likely scenario be a period of uncertainty and then elections? And of these two scenarios how will the markets react to them?

A: I don't have a strong view on the final outcome but from what I understand so far it seems as though the Italians will probably go back to another election. So that is probably the base case but if you take a step back, the key issue in Europe and particularly Italy is growth. If you look at the Q4 output in Italy it contracted again and then if you look at Italian growth in level terms it is actually below the level of what it was in 2009 during the global crisis. And clearly below the 2007 level and unemployment in Italy has now risen about 5 percent from that low point as well.

So the key issue in Italy in particular is really growth and what the Italian electorate was saying that austerity is not working and that is very clear and it is really putting a lot of pressure on the economy. I suspect that will continue to make the job very difficult for the European authorities and put more downward pressure on markets.

Q: As a market man what are you expecting? Are you expecting the risk off that we saw yesterday to continue for sometime?

A: Yes I suspect it will not just because of Europe but also the growth data has been a little bit more mixed recently. Probably over the last couple of months we are seeing some cyclical improvement in China. For example we have seen some better data out of the US but more recently the revisions relative to expectations particularly in US have rolled over quite sharply.

In addition to that you still have the sequester coming up in the US. The risk is that there would be more fiscal tightening in the US and that would put more downward pressure on growth there and disappoint expectations.


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