Jun 27, 2012 04:12 PM IST | Source: CNBC-TV18

StanChart expects little from EU; overweight on China

With the European Union Summit scheduled to begin from tomorrow, global markets are looking at cues to improve market sentiment. Although, the expectations from the summit is quite low, in the absence of strong measures from the summit markets are likely to be concerned, opined Manpreet Gill of Standard Chartered Bank.

With the European Union Summit scheduled to begin from tomorrow, global markets are looking at cues to improve market sentiment. Although, the expectations from the summit is quite low, in the absence of strong measures from the summit, markets are likely to be concerned, opined Manpreet Gill, Senior Investment Strategist of Standard Chartered Bank.

In an interview with CNBC-TV18, Gill further added that they are currently underweight on Europe but, remain overweight on Chinese and Korean markets. The global risk sentiment, according to him, is now being driven by Europe and global markets are ignoring the developments taking place in places like China. Gill is quite hopeful about China and believes that it could surprise the markets in a positive way.

Citing concerns over the weak rupee, Gill said that the Indian currency is now being driven by global risk appetite.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Going into the EU Summit the expectations are already extremely low and this is going to be the 19th EU Summit that we are seeing. If once again the EU Summit disappoints, do you think the markets are going to give up any hope of a concrete policy action from the policymakers and hence the equity markets will remain subdued? Summits can come and go, but we are not going to get anything by way of an action.

A: That's right. I am not sure markets would give up completely, but they would be very, very concerned if we don't get some clear measures to resolve some of the big outstanding issues at this summit. The fact is that peripheral government sovereign debt markets are already showing signs of stress. That's the first place where we will see worsening of the situation, if we don’t see some strong measures from the summit.

I think market expectations are low. But, there is still room for further disappointment from this point onwards. Markets are clearly sending a signal that they are concerned. They are looking for some strong measures from policymakers and if they are not forthcoming, it is possible that we may see a period of volatility starting within European peripheral debt markets and maybe extending further within the region.

But, we do believe an end event like that maybe required to push policymakers in Europe to take the stronger measures that haven't been forthcoming in a big way so far.

Q: Are there chances that there could be a strong bout of risk aversion after the summit? Clearly, these are difficult to solve questions. You don't see Germany agreeing to the joint bond in one summit. Is there a chance that we are going to see some deep cuts?

A: It really depends on the asset class. Like you said earlier, there is a lot of bad news already in the price. Expectations are very, very low. But clearly if we see a disappointment, the room for weaknesses is likely to be concentrated on peripheral Europe debt markets, European equities where we are underweight and possibly some other sort of high-beta risky assets.

But if you look at asset classes like global corporate credit, which have remained remarkably well supported throughout periods of risk aversion, we think those will be less adversely affected. That's why we believe those are sort of better places to ride out the risk of any sort of bout of risk aversion.


Q: What about Asian equities and maybe even BRICS equities and currencies? Now we are getting a little confused where to put India, in Asian equities or BRICS countries. They have seen some very severe cuts and the kind of cut we saw in the Real, Ruble, Rand, will that now peter out or do you think there will be more punishment as well in the Asian countries' equities? Is there any scope for buy now?

A: We really look at most of these countries from an Asia Ex-Japan region basis to begin with. I think the important distinction to make here is that while some of these markets have been very beaten down, whether that’s on the equity market or the currency, the fact is that many of these markets are high-beta markets.

These are very sensitive to global investor risk sentiment and because of their sensitivity to global investor flows is the main reason why we have focused on where we have an overweight within the emerging market world and the two markets we have focused on within the emerging market world are China and Korea.

It is partly because Chinese equities are likely to be more sensitive to what's happening on the policymaking front within China where the picture looks a little more optimistic and Korea which ultimately looks more closely to the economic fortunes of the US economy where again you could make a case that things are not great. But, they are definitely better than what they are in Europe. So that's really our focus at this point in time.

Q: If you are underweight, how do you expect the European equity markets to proceed after the initial two or three day reaction to the EU Summit.  What kind of downside can we expect?

A: When you have a negative policy reaction, it's always very hard to say where markets will stop, when they start falling in a big way. That's part of the reason why we believe an underweight is justified and for investors interested in European equity exposure, we think there are limited pockets where you can look for some value.

For example, dividend yields on many high quality companies are actually quite sizable now and most of the business is actually from outside the eurozone. But the fact is that investors likely to invest in such ideas are likely to see a very volatile ride. That's why we think within the developed world, within equity market exposure, the US is a much better place relative to Europe, until we begin to see more clear signs that policymakers such as the ECB are willing to come out in a much stronger way to support markets.

Q: What might be the smart money view or in fact, what might be your view on India, both rupee and equities? Some views are that the Nifty bottoms out at 4900 and is not showing a tendency to go below that, like wise the rupee perhaps will be supported at 57.30, any views?

A: On the domestic equity market I think you can make a case on the downside. You have some sort of support again partly because domestically, so much bad news is priced in. If anything, we have room for further upside surprises rather than downside surprises. But, the trouble from foreign investors' perspective is that the currency part of the equation does matter and from the rupee point of view, we still remain a bit concerned.

The rupee will be driven partly by what happened within India but, it will ultimately be also driven partly by what happens to global risk appetite. That's where we have a little bit of concern and that's why we are comfortable with the neutral allocation to India from a foreign investors' point of view.

We think India would perform in line with the region but that's the reason why our overweights are really concentrated on stories like China which are much more domestically driven. For India I think, we are still a little concerned about how volatile the currency could be in the short term at least.

Q: From a global market point of view, where do you think the next pocket of worry will emerge maybe, by way of an event?

A: The really big event at the moment is Europe. That's what is driving global risk sentiment. I think what the big event which could be seen from markets is if you reach a point where the ECB is forced to pursue further monetary easing. We think that's a likely outcome. But, we are clearly not there yet and markets may need to put more pressure on policy makers before they are willing to step out in such a way.

The other big event which I think markets are not concentrating on is what's happening in China. There has been a lot of pessimism. Chinese assets have suffered but, the fact is that recent economic data has surprised on the upside and that has combined with policy. That has begun loosening and stimulus measures are being put in place. But, that is a story which is relatively less correlated to what is happening in Europe and that is the other event or second event that could take global investors by a little bit of surprise in a positive way.

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