Moneycontrol
May 21, 2013 04:30 PM IST | Source: CNBC-TV18

Bernanke unlikely to upset mkts; may not cut QE3: AMP Cap

Shane Oliver of AMP Capital Investors thinks that US Federal Reserve Chairman Ben Bernanke is unlikely to upset the financial markets as that will undo a lot of good work done by him over the last year in terms of trying to push those markets higher as aid to the US economy


Shane Oliver, AMP Capital Investors feels US Federal chairman Bernanke is unlikely to upset the financial markets in Wednesday's meet. 


“Bernanke will not upset financial markets because it will undo a lot of good work that was done over the last year in terms of trying to push those markets higher as aid to the US economy,” he says in an interview to CNBC-TV18. 


Also Read: Limited scope for further re-rating of India: BoA Merrill


Oliver says, although Bernanke is bit comfortable about the US economy and jobs market, he is a little nervous about the market trends. He feels Bernanke would want to project some confidence but won't go to the extent of scaling down third round of quantitative easing (QE3).


Ben Bernanke will testify in front of the Joint Economic Committee on Wednesday to give an update on the latest outlook for the world's biggest economy and largest oil consuming nation.


Meanwhile, Oliver feels that the QE3 will taper down only when the US economy strengthens.


Below is the verbatim transcript of Shane Oliver’s interview on CNBC-TV18


Q: What will happen later this evening? Will Ben Bernanke say something that will shock the market or will it be one of those easing statements that will give the market belief that liquidity is here to stay?


A: I think, more likely the later. Ben Bernanke will not upset financial markets because it will undo a lot of the good work that he has done over the last year in terms of trying to push those markets higher as an aid to the US economy. Ben Bernanke is a little more comfortable about the US economy, the jobs market, the latest figures look a bit better. But, like the Fed president of Chicago, Evans said overnight that he is still feeling a bit nervous about things. We have seen this pattern in the past where the data looks good for the first three months of the year and then tails off a little bit. So, Bernanke would want to project some confidence but not so much that it looks like QE3 is about to start tapering off.


Q: Even the people who believe that eventually a tapering off might happen, they believe it may happen towards the end of the calendar year, not immediately. In that sense, do you think global markets have breathing space for the next five-six months before any such event comes to the fore?


A: They do, although as we get closer towards the end of the year, markets will start to focus on it more. The key here is that when QE3 starts to taper off or gets on way down or even starts to come to an end, it will only be because the US economy is stronger.


In 2010, QE1 ended in March, 2011 where QE2 ended in June and then the Operation Twist which ended in the first half of last year. After all those monetary easing sort of came to an end, markets did fall. That experience largely reflected the fact that when the monetary easing ended, it ended too early. It ended almost arbitrarily before the US economy was onto a sustainable footing.


This time around, when the end comes, it will only be because the US economy is more sustainable. Therefore, one have as big negative impact as was seen in 2010 or 2011. It is something that can cause volatility in markets but I don’t think it is going to cause the setbacks that we saw two-three years ago.


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Q: What kind of mood do you sense amongst investors towards equities right now? Are we in the phase where gradually more and more people are getting converted into the idea of being in equities or taking on some more risk?


A: That’s certainly the case. Sir John Templeton, who was a US investor, once observed that bull markets go through four phases. They are born on pessimism, grow on scepticism, material on optimism and they die of euphoria. At the moment, we are somewhere between scepticism and optimism. In other words, the pessimism that was around a year ago has well and truly faded.


There is bit more optimism around but there is also a bit of scepticism out there. So, investors are warming to the prospect of owning more shares and that might be the place to be for the next few years. But, we still have a fair way to go when you look at fund flows and mutual funds indicators.


They still suggest that there is quite a lot of money on the sidelines that can come into equity market over the next three years to push markets higher. I certainly don’t sense any euphoria that you normally see at market tops. I think we are a long away from that.


Q: What’s your observation on the liquidity interest in emerging markets? How much proportion of the money that we are pulling reflects what’s been happening in the US and their policies versus what’s happening in Japan? What’s more important for an emerging market right now?


A: Normally, when share markets in the US start to rise, you see investors putting more money to work in the emerging world. Recently, we have seen a little bit of that. The emerging world markets have rebounded notwithstanding the volatility last day, but they have come up from their lows, which is a positive sign.


The fact that you have got Europe out of the headline, so there are still issues in Europe but the bond yields have well and truly settled down and we are not getting the flow of negative information out of Europe. The fact that you have quantitative easing occurring in the US and the US economy because of which the private sector particularly housing is looking stronger, then you have Japan which seems to have come from almost nowhere for many.


It seems to be back in the race again with a huge gain in the Japanese share market and lots of cash being pumped into the Japanese economy. But, some of that money will find its way into emerging world and therefore, you will see those markets pick up as well. The only thing I am a bit unsure about is the dynamic regarding commodity prices.


Last decade was associated with a huge surge in commodity prices particularly benefiting Latin America but that was on the back of 10 percent plus growth in China and very constrained supply.


Now, you have China’s growth 7.5-8 percent, so it has come down and you have an increase in supply of commodities as a result of mining investment. So, commodities really are not as bright. Therefore, when the flows go back to the emerging world and they may have started to do that, they will be more discerning focusing more on Asia as oppose to South America given that Asia tends to be more a commodity user rather than a commodity producer.


Q: The experience over the last month and a half has been that India has been pulling most amount of money perhaps second to a market like Taiwan in the Asian region. Has the mood changed around on India for investors?


A: It has become a little more positive. Some of the reform moves that have been announced in India have calmed investors a little about the Indian outlook. We have also started to see the inflation picture over last the month or so looking healthier in India, whereas investors were thinking that it is heading towards very low growth and high inflation and therefore, the Reserve Bank of India cannot do much about it.


Now, there is a bit more optimism that inflation has come off - both the consumer price index (CPI) and wholesale price index (WPI). Therefore, there is more scope for the Reserve Bank of India to support the economy and perhaps cut interest rates further which is sort for some investors to look beyond the weak growth numbers and say they are awake. But now, with inflation cooling a bit, provides more scope for more rate cuts and therefore, some interest has returned.

Likewise, if you look at poor price-to-earnings (PE), India is still in the top half of the range and Asia is still relatively expensive. If you adjust those PE, price to book values for the return on assets and EPS growth, then India looks okay and is on the cheap side of the equation. So, that has an impact that investors can see a bit of value in the Indian share market and are a bit more optimistic about the economic outlook in India and therefore, you are seeing some of those fund flows return.

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