The global markets will be either up or sideways in May, says Mark Matthews of Julius Baer. "Despite all the problems in Europe over the past month, we are basically flat on the S&P. I don’t know if we are just immune to Europe or there are more important things going on elsewhere, but for whatever reason the market have held up quite well," he adds.
He doesn’t expect a QE3. "I don’t think the data allows Fed to do it. My reading of the Fed’s various statements is that on balance it’s becoming less in favour of additional monetary stimulus," he asserts.
Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying video.
Q: People entered May with a lot of trepidation about how much downside risk there was, but things look quite flat in the context of that. How do you reckon things will play out for global equities?
A: I think they will be either up or sideways. I am not sure if they will be down that much. That is the way I see it. Infact despite all the problems in Europe over the past month, we are basically flat on the S&P. So, I don’t know if we are just immune to Europe or there are more important things going on elsewhere, but for whatever reason the market have held up quite well.
Q: Do you think it's a counter veiling force between liquidity and what is happening in the Euro zone or is there something else playing out in the market sentiment right now, different from liquidity?
A: Broadly, there are three things happening. China, the largest economy in Asia, I think at the margin the squeeze in the availability of credit is starting to relax now. We can see it in the Shanghai interbank rates; we can see it in new loans. I am not saying it will turnaround radically, but atleast the unavailability of credit, which is the big reason for the deceleration in growth in China, is changing. So that is one important thing, China is getting better at the margin.
The US data was a little bit ‘iffy’ in April, but the PMIs that came out yesterday were very robust. So, the US looks good in terms of its economy, not fantastic, but good. The earnings have been above expectations as well, admittedly low expectations. But we have had about over 70% of earnings out of the 300 odd S&P companies that we have reported so far, beating expectations.
Europe, the PMIs that came out overnight were dreadful, but in a strange way that maybe a good thing. The reason I say that is there is a force growing by the day stronger in Europe that you could broadly call the growth packed force. I think it is being led by the French socialist candidate Francois Hollande who likes he is going to become the President of France. A number of other countries getting onside with this, Italy, Spain and even the ECB president says he is for adjusting the policy in Europe to be more pro-growth. So, the irony is that the worse the numbers get in Europe, the greater the likelihood of eventually is that they enact some kind of growth positive measures. So, adding it all up on balance it doesn’t sound that bad.
Q: How much of a factor do you think the Fed statements are in terms of holding sentiments up? The takeaway from the last Fed meeting seems to be that the twist will give way to a QE3, is it that expectation that is keeping people buoyant?
A; I didn’t read that way myself. I don’t think there will be QE3. I don’t think the data allows them to do it. My reading of the Fed’s various statements is that on balance it’s becoming less in favour of additional monetary stimulus. The number of Fed officials, who now think rates will go up in 2014, has risen from about 45% to about 60%.
They have ratcheted up their growth forecast and taken down their unemployment forecast. So, I suppose its ironic, maybe you would get sentiment out of Europe in their bad numbers. Infact the US economy is just doing quite nicely which is a good thing. That is certainly the way it is working, the US economy is just pebbling along, it is sub-par for sure, but it is not going into any recession anytime soon. So, if I add it all up, it’s not a bad environment actually.
Q: Do you have a sense of what the second half of the year may look like for emerging markets and markets like India because within that market performance there has been disparity as well; the S&P is 1,400, but Asia has not translated that into meaningful gains for itself?
A: It is a very large asset class and there are various pockets that are doing various things. So, there are some emerging markets that are doing well and I like them. They are small markets, but the South East Asian markets, countries like Thailand, Philippines are doing well. I don’t see why they won’t continue to.
China, the largest and the most important emerging market, I don’t really like to invest there because I don’t like the quality of the governments frankly both at the sovereign and corporate levels. But I must admit that at the margin, I believe the liquidity crunch is ebbing away. That is probably the biggest factor determining asset prices there.
India, I am afraid I cannot find anything good to say about it, I think you have this policy waffle, which will continue for the duration of this current government, which I don’t see going away until it comes up renewal, two years from now. FDI, looks like there could actually be some FDI outflow; Telenor said they might leave the country. So, it is all over the place for emerging markets.