Pankaj Vaish of Citi said he is most concerned about rupee. The argument about the dollar strength also seems overdone because the dollar hasn't really moved that much in May. He said the dramatic fall against the dollar cannot be blamed onto excessive buying of gold alone.
The debate on liquidity is a tricky one US bond yields have continued to move upm which will eventually pull other asset classes aong with it, feels Pankaj Vaish, MD & Head of Markets-South Asia at Citi. In an interview to CNBC-TV18, Vaish says the exits are not easy when Fed continues with quantitative easing. The carnage seen around the world have genesis in the fear that exits are difficult, In the same breath, he gives example of Japan, whose gross domestic product (GDP) is quarter of that of US and yet the country's central bank has leashed out stimulus worth USD 75 billion.
However, Vaish is most concerned about rupee. The argument about the dollar strength also seems overdone because the dollar hasn’t really moved that much in May. He said the dramatic fall against the dollar cannot be blamed onto excessive buying of gold alone. The currency is the single most important instrument that foreigners look at and for the last 25 years, it has put fear of God among investors.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Good time to have conference with this raging debate about liquidity. You guys are getting right upfront with it. What is the sense that you get on this liquidity argument? Will they or won’t they for the second half of the year?
A: Liquidity is the most important thing that is driving the risk-on, risk-off attitude in the whole market and this is an important one that shows how when Ben Bernanke was talking about quantitative easing one (QE1) and QE2 in terms of people worries about the exit and he had said that we can shut off the tap within 15 minutes.
This price action in the last two weeks was very good indicator that exits are not that easy. Exits are very difficult, you get the whole world benchmarking to your short end and then if you are doing QE and buying out to 10-30 years, every risk asset gets priced based of that.
Therefore, the carnage that we have seen, not just in the Nikkei but in bond yields around the world except India, has been quite tremendous in junk bonds, in corporate bonds, refinancing for companies, currencies, all of that stuff gets affected.
So, liquidity is important and it is not going to be easy because the US bond yields could head even higher, which means that it will pull along with it a lot of other asset classes also. So, it is a time for a lot of caution.
Q: They have been fairly canny central banks though and extremely sensitive to equity market reactions. It is a probability game right now but what kind of probability would you attach either that QE coming in from the US is likely to slowdown or turn tide also from Japan?
A: The data in US us improving. You have seen that in payrolls, you have seen that in housing, which was the epicenter of crisis - all of that is improving. It means an extraordinary amount of stimulus has have put into the system of buying USD 85 billion a month in securities. And for Bank of Japan to buy close to USD 75 billion with a gross domestic product (GDP) that might be a quarter of US’ GDP and that is a very substantial commitment.
Since data are improving and they are just talking about perhaps slowing down the pace at which they might reinvest the maturing securities - that might be third derivative or something. But it was enough to cause a panic in the market and that should not be underestimated. That is something that perhaps a certain central bankers may have been a bit too comfortable about that this exit is very easy. I think they will have not choice. If the data are improving then you will need to start backing off a bit, because they still are providing tremendous amount of stimulus in the economy. However, that will need to be backed away.
So, the whole readjustment in risk pricing will be meaningful for a company that has junk rating. To be able to borrow money for 30 years at 5 percent even if that is 500 bps over short end treasury, a 5 percent absolute for people to lend to a below investment grade credit is full of risk and that lesson will come back and hit people and there is no getting around it. Nominal prices of risen because nominal stimulus has been tremendous but at the end of the day if the real fundamentals have not improved then you need to go back to real pricing and that is what will come back and haunt peoples’ portfolios.
Q: Holes have begun to show up already in equity performances, you can see it in the Asian market context in the eurozone as well, to a lesser degree the US markets. Would you say at this point there is a significant amount of risk-off or do you fear that is going to come through over the next couple of weeks, which would also then imply sharper downside for markets?
A: Equities have held up relatively okay except for Japan because Japan had also gone up in a somewhat crazy amount. So, outside of Japan, equities have still held up relatively okay. When we spoke on CNBC at the end of April, I was talking about that equities could yet have a blow-off top first and I think that is kind of what we saw there has been this blow-off top, S&P has come off, Indian equities have come off, so leaving Japan aside, equities will still be alright. I don't think there is crash and burn in equities maybe we correct another five-seven percent, but ultimately I don't see a massive crash and burn. The big damage is going to be more on bond yields outside of India and on currencies. Currencies are where you are seeing the brunt of the problem.
So, this bond yields backing up as well as the risk-off in currencies, I think that will be an important way that this is going to manifest itself perhaps less so through the equity's side.
Q: That is actually the overarching theme of the last month or so. Five percent appreciation on the rupee, which basically means in dollar terms India is actually down about two-three percent for the year - for the people who you will be speaking to at the upcoming conference that must be a big deal because they are actually losing money on India position, somewhere they have pumped in a large amount of capital?
A: . Globally, around the world over the last 25 years, it is the currency that puts the fear of god in investors. Whenever people start thinking this could gallop, this could go from two percent depreciation to 10 to 20 percent, then nothing else really matters whether you make 10 percent in the equity market or 15 percent or whether you make seven-eight percent in your bond coupons - all of that is just immaterial compared to the risk that you have on the currency. That is why even on April 29, when we last spoke my concerned was on the currency.
Unfortunately, it has come true that we are looking at a situation where the Indian rupee has weakened even more than the other Asian currencies. There is some amount of worry out there among Foreign Institutional Investor (FII) and they have come and hedged quite a bit. Over the last two weeks we have seen fair amount of activity among FII investors who had hedged end of 2011, because they had gotten burnt then in 2012, they lifted some of those hedges and this year have had to come back and put some more of those hedges on. So, there is that worry and addressing that is got to be one of the most important things that authorities will have to do which they have started doing.
Maybe, there is too much reliance on gold. We seem to think that gold is the reason why dollar-INR is where it is. It is certainly a big culprit and so. all the measures that the authorities are trying to put around it are helpful, the inflation indexed bonds atleast the first auction went off okay. But I don't think it is just that. There is a overall strong dollar environment but still we are underperforming quite a bit. I think some of that has to do with people being unhappy that the legislative agenda had not progressed, which is what people's hopes were in the middle of April but that has not progressed. They are not sure what the next parliamentary session will look like and they are not sure when the next elections will be. So, we have really not kept pace even with the rest of the world in terms of the currency movements.
READ MORE ON Pankaj Vaish, Head of Markets-South Asia at Citi, quantitative easing, Ben Bernanke, corporate bonds, refinancing for companies, currencies, consumer price index (CPI), Wholesale Price Index (WPI), current account deficit (CAD
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