Don't see value in equities, commodities: UBS

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » Nifty BSE | NSE 10/02/12 Are Mutual Funds betting on Nifty?

Bhanu Baweja of UBS expects a come back of the Euro sell trade. "We think the Euro-Dollar should head towards 1.33."

Baweja feels equities and commodities are fully valued currently. "We don't see value in equities and commodities."

On the Indian bond market, Baweja pegs the 10-year yield at 8.25%.

Going forward, he says, India has a very serious inflation issue over the medium-term.

Below is the edited transcript of Bhanu Baweja's exclusive interview on CNBC-TV18. Also watch the video.

Q: What is the trajectory for the Dollar Index itself? We just saw it fall from the 80 plus mark. What's the trajectory for the next month or the next quarter?

A: Over the next quarter we think that the euro sell trade is likely to come back. The trade that we are recommending to our clients is to be short the European access, which is basically sterling and the euro versus several emerging markets. We do think that the problems in Europe will dictate trends in currency markets rather than monetary policy by the Fed. So we do think that the Euro-Dollar should head lower towards the 1.33-mark over a three month period, which basically means that the DXY should strengthen-the broad trade rated dollar should strengthen from out here.

I want to be clear that this is not because we are huge fans of the US economy. We think the US economy will do well for a while and then will in fact plateau out. This really is a euro sell trade rather than a dollar buy trade. Almost exactly the opposite of what happened last year where the market was selling the dollar against pretty much everything.

Q: Till late 2009 it was a fairly easy sell dollar and long equity, commodities trade that practically everyone was indulging in. After that we have seen the dollar taking a U-turn and commodities and equities are moving in a range for a better part of 2010. What is the best rate now in commodities and equities? Do you see it breaking out of this range?

A: Both commodities and equities have gone ahead of that ranges. Commodities are doing quite well, crude oil is above USD 80 and the S&P has gone through 1,150. So it's fair to say that they have broken north of the recent ranges. As it happens from these levels we don't see a lot of value in both equities and commodities. Generally speaking, they are fairly fully valued and you are right.

Last year the trades that we see were long risk, basically spread compression, volatility compression all of those positions funded out of the dollar. The dollar funding part of that trade has already reversed and as liquidity has tightened-mind you liquidity is broader than just interest rates right now-we think that the other two trades, which is spread compression and volatility compression, will also reverse, which means that the credit which has performed extremely well I think will begin to weaken through the course of this year and I should say the same thing about volatility. Volatility in the markets across all asset classes is too low and is expected to rise.