The US data has improved from last year, Guillaume Menuet of Citi believes that that underlying fundamentals in the US are recovering steadily. However, concerns relating to lack of fiscal deal remain.
“When you look at availability of credit, market matrix, unemployment, everything is pointing towards a recovery gaining momentum in the second half of the year,” he said in an interview to CNBC-TV18.
Meanwhile, he does not see further upside to the European market in the short term despite the rally seen in last few sessions. He expects commodity prices to weaken further.
Below is the verbatim transcript of Guillaume Menuet’s interview on CNBC-TV18
Q: How do you see the markets panning out from here? Are you expecting that developed markets like at least the US equities are going to see a bit of a resistance at this point with data not quite keeping pace with what it was in 2012?
A: The trending US data continues to be better than what it was only a year ago and that’s where markets are today. We still continue to see a sizable steady recovery in the US in terms of its underlying fundamentals. We have some concerns about the lack of deal on the fiscal side. When you look at availability of credit, market matrix, unemployment, everything is pointing towards a recovery gaining momentum in the second half of the year.
Q: What about Europe itself? There have been increasing noises in favour of growth and in terms of austerity, are you seeing European indices sucking in a little more of global liquidity?
A: It’s quite difficult to think that given the rally that we have had in the last four-five days, there is much more upside in the short term. Investors in general have been speculating and front running the likely European Central Bank (ECB) rate cut announcement that takes place on Thursday next week.
It is not because you called for end to austerity that you certainly get growth going, countries are bound by fiscal treaties, they have to deliver structural budget deficit adjustments. It is anywhere between 0.5-1.5 percentage point of GDP every year depending on the countries in question. They also have to deliver structural reforms in the short run. This means that the fiscal stumps remain quite tight. Europe to grow has to de-leverage first. Some countries are still at the very beginning of this de-leveraging process.
Q: What’s your sense of the kind of risk appetite which is now prevailing in the market? We have started seeing emerging markets do slightly better after three-six months of underperformance.
A: If you look at what we have in terms of indices giving surprises, the kind of recovery that you have seen in emerging market sentiment is predicated by the positive surprise gap that we have seen in our numbers. Emerging markets are doing better than developed economies because of the different position that they are in the cycle and the fact that at the margin, commercial prices should help being lower increased the disposable income in households. So, the outperformance of emerging markets from market’s standpoint, but also from the bourse standpoint is the way to play this.
Q: Would you prefer it as an asset class for the next six months? Tendency of taking money from emerging market funds and putting it in developed markets especially in indices like the Nikkei, does that give way to more money coming to emerging markets in the next two quarters?
A: It is difficult to think that Europe will certainly grow and that the profit dynamics would certainly improve. Europe is three or four years into an event in terms of de-leveraging that would last another two-three years. I am struggling to think that profitability would improve sufficiently on a European basis generate further upside for equity markets.
Q: I was referring to money that went from emerging market funds to the Nikkei, to Japanese stocks, to the US stocks. What would be the preferred asset classes for the next two quarters?
A: On a relative basis, equities still is the least expensive asset class.
Q: There has been a bit of a bounce back from the lows commodities saw a week ago, how might commodities trend?
A: We think commodities continue to weaken.