Richard Gibbs, Global Head, Macquarie Securities expects the downturn seasonal liquidity to continue for the next couple of months for the US markets. In that backdrop, he says, any kind of perceived bad news or disruption can have disproportionate impact.
For India, he expects companies with exposure to foreign markets getting a boost from the weak rupee. "Whether it's a substantial as Reliance reported remains to be seen. But it does mean are going to see a similar effect to what we are seeing now in Australia with the weaker Australian dollar and that is the translation of greater levels of income and earnings back to the domestic economy," he told CNBC-TV18.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: How would you sum up the global mood now? It seems to be a bit more stable and now quite rattled even after the Bernanke testimony?
A: Yes, certainly I think it has been bolstered by G20. The communiqué suggesting that the G20 members are going to do everything they can to limit that volatility and to ensure that when there is a change of policy direction in the United States (US). It does not have undue consequences particularly for those emerging market (EM) economies.
Q: Specifically on EMs though has the mood improved any or is it just a breather for markets over there and pullback they have seen?
A: I suspect, it is just a breather because we have not yet seen the US begin its tapering strategy. I think once it begins that, then we start to see capital allocated on a much more discretionary basis. At the moment in the last couple of weeks we have seen some fairly flighty capital movements from the EMs, but we are yet to see some of that more stable portfolio capital being reallocated.
I think that is really when the pinch point comes when we actually see the Fed move towards talking about the commencement of the tapering strategy in terms of its monetary policy stance.
Q: So would you say that the summer correction in global equities is over or do you think it is premature to say that?
A: It is premature to say that because we know what the summer correction really is driven by. It is driven by the seasonal downturn in liquidity, particularly in risk asset markets, stock markets. As a consequence of that any kind of say bad news or disruption can have a disproportionate impact. I don’t think we are through that yet.
We are just beginning now the major summer holiday period for the US and Europe. That means that downturn in seasonal liquidity is going to continue for the next couple of months.
Q: How do people feel about India at this point, because the couple of global investors we spoke with last week were disappointed with the monetary policy action that came through and they read that as a negative for a market like India?
A: I too was a bit disappointed by the monetary policy action. Then on the weekend I saw a Reliance Industries results and I reminded myself that there are increasing number of Indian companies that have a large proportion of their earnings in foreign exchange or foreign currencies.
As I translate those back against the backdrop of a weaker rupee that means that they are going to get a lift in their earnings, whether it is as substantial as Reliance reported remains to be seen. However, it does mean we are going to see a similar effect to what we are seeing now in Australia with the weaker Australian dollar and that is the translation of greater levels of income on earnings back to the domestic economy.
Q: The curious issue about Indian market right now is that narrow handful of stocks from sectors like consumers have become quite expensive because they are the ones which global investors want to own. Do you see any risks in that or do you see this trend accelerating even going forward?
A: There certainly is a risk in that. We have a very narrow base and a concentration you tend to find that markets will overprice the growth prospects. So, investors will overpay for those growth stocks and as a consequence of that alters the risk profiles of those industries, sectors and stocks and makes them more risky than what otherwise be the case.
So, it is important that we continue to see diversification of the risk through the asset markets in India. However, I think there is a risk that we are going to see investors seeking out two sectors in particular. 1) The consumer staple sector, which is a very defensive sectors of the economy. 2) Those companies across sectors that have an increase proportion of their earnings in foreign currencies as they bring those back of course they will receive that earnings lift. That does raise the prospect of overpaying if you like for growth.
Q: Has the worst of the outflows in relation to the exchange-traded funds (ETFs), which were taking money out of EMs, has that played out for the moment you think because that was what was rattling a lot people over the last few weeks?
A: I think it has played out for the moment. Generally, what you see is the ETFs because they are the most liquid and will be the first point which you see the capital outflow and will see very liquid instruments being sold. Then that money will be returned to its domestic base where it is domiciled and generally that happens in pretty much the first and only wave. It is after that you didn't start to see more decisions in relation to asset allocation and capital allocation generally.