Don't see value in equities, commodities: UBS

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

Q: There may not be value in it but the fact is that it is rising and they are rising because liquidity is chasing them. Over the last few days we have seen record inflows as far as equities are concerned. What is your own sense where is smart money headed in the next three months or so?

A: The dollar will do well not because of the merits of the US economy but because of the demerits of the Eurozone. First I would not be funding out the dollar I would be funding out European currencies.

Second, there is still value in the emerging markets in the front-end of the bond curve. So I would move into front-end in the bond market in the emerging markets and that's where I would be. I would maintain a very small long position in equities but would be taking profit as the market moves higher from out here and I do think equities can stay relatively well. But through the course of the year, as the volatility begins to climb, the markets are going to find it much more challenging policy environment.

Q: We have seen a near double-digit inflation in India. What you expect in terms of the Reserve Bank of India (RBI) action and in turn its impact on bond yields?

A: We do think that as liquidity does tighten in the very near term, you will find yields rising with the 10-year probably approaching 8.25% or 8.30% mark. But it's difficult to call for much further weakness in the Indian bond market despite high inflation because this is a captive bond market. It is a bond market where banks are meant to hold government bonds-it's not a completely freely traded bond market. So from those levels in fact we might actually tactically buy the bonds.

As far as inflation is concerned, we think in the next 3-6 months inflation is going to come lower because the food price inflation is going to be coming off. But make no mistake India has a very serious inflation issue over the medium-term. It's a very highly supply constrained economy and Indian agriculture is very misunderstood and certainly underinvested sector. The buffer from external shock just doesn't exist.

We are quite worried about inflation over the medium term so we would be no bulls in the Indian market over the medium-term in the Indian bond market, that is, much as over the next 3-6 months we might find the inflation comes off.

Q: What is your call on the Indian rupee for 2010?

A: Three months back when we spoke about a short European access-long INR position, which is something that I have also mentioned in the first part of my comments to you. At this point although the market is fairly short in the Euro and fairly long on the INR, which could lead to a squeeze the other way-ie Euro-INR and Sterling INR going higher-I quite like that as a secular trend in the medium term. Moving forward we still expect the rupee to do well and the preferred currency of the short side being either the euro or the sterling.

But even against the dollar we think that the rupee will hold its own and are expecting a modest appreciation towards 43 over the next several months.