The rough patch in global markets continues. In the Citi Investor Conference, Citi top brass are trying to tell investors and companies how to get through this very turbulent phase.
According to Geoffrey Dennis (MD and Global EM Strategist, Citi), lot of investors expect a further significant disruption within the euroarea and that will eventually cause them to turn more cautious again.
Given the bleak global growth environment, Dennis expects more liquidity injections from the central banks. If that happens, global markets are likely to see a big rally. Citi expects the Chinese economy to fare well in the second half of the year, which will be a very important catalyst for markets, he added.
However, he doesn’t see the global economy going back into recession. "We are not going back to where we were in 2009 and if that’s true at some point equities have to find a floor." Dennis sees a reasonable chance of earning upto 20% returns this year in equities in emerging.
Meanwhile, Brent Robinson (MD and Head, Citi Invest Research, APAC) believes that strengthening dollar is a big issue for Asia. "When the dollar is strong, Asia underperforms. So if we continue to see dollar strength then I think you are going to see Asia underperform."
Most investors are gravitating to the dollar because of risks in Europe, if the eurozone crisis resolves then one would see money flowing back into Asia.
Aditya Narain (MD and Strategist, Citi India) feels that most investors are worried about the fall in rupee. " The biggest worry for India really is on the currency front because that is where you don’t have as much control or as much ability to fix it."
Citi is overweight on Hong Kong, Korea and Taiwan and sees biggest value in these countries. On the other hand, Australia and India and Japan are its biggest underweight.
Below is the edited transcript of the interview with CNBC-TV18. Also watch the accompanying videos.
Q: Is the world coming to an end in June or is it not?
Dennis: I don’t think it is coming to an end. There is enormous investor uncertainty about what will happen in the next round of the Greek elections. We are concerned that ultimately Greece may well be forced to leave the euro although we don’t really have any sense of timing. So, to a certain extent it will depend on what those elections results are.
What we are trying to do at the same time is reminding investors actually, the recent growth especially in emerging markets, in equity markets are relatively cheap. So, unfortunately we have to play this as it comes and see what the election results look like and whether we get a government elected in Greece and is fine with pro-austerity, pro-reform in which case markets could well rally after that.
Q: There have been lot of parallels drawn with the Lehman episode but when you talk to investors do you get the sense that they are positioning themselves to buy if there is a big capitulation in the market or will they panic once again if it actually happens?
Robinson: So far we don’t see any panic. There has been some outflow of equity funds globally, but there has not been panic so far. Our view is we would use the summer slowdown or the summer weakness for a buying opportunity probably towards the end of the summer because that’s historically when analyst estimates are cut. August and September tend to be the two worst months of the year. If we can get some kind of resolution with the European situation, the summer time would be the best time to buy.
Q: Is that the only risk because India has been underperforming off late? Or do you think a lot of local issues are compounding the problems for India?
Narain: In terms of market performance, I don’t think there has been such a compounding effect because India has underperformed but very marginally. It is also a function of which timeframe you pick up. But in many senses, memory around that short this time.
In 2009 there was a very bearish view and the markets bounced back very dramatically. 2011 December was similar. So, this time around both globally to some extent and clearly as far as I sense from an India perspective, people are watchful, people are careful but nobody is closing his eyes to either the market or the opportunity.
Q: What’s the flip argument that we will get a bit of a muddle through and markets then heave a sigh of relief and we see the second of the year being much better? What probability would you assign to that scenario?
Dennis: There is a reasonable chance that will happen, but we need to see what sort of resolution you get in terms of this election. The other big uncertainty is when we get a sizable liquidity injection once again from ECB and who knows potentially from the Federal Reserve as well.
That’s where your potentially strong second half rally comes from. Clearly, overriding all of this is that a lot of investors now believe that there is going to be further significant disruption within the euro area and that will eventually cause investors to turn more cautious again. This is why planning for this episode is still relatively good.
But we believe very strongly that the central banks in this environment of somewhat disappointing global growth, very weak growth in the developed world, virtually no inflation in the developed world, concerns about exchange rates within exchange rates, the euro itself within the European continent, we continue to believe there will be more liquidity injections if necessary.
That’s where your big rally comes from assuming that does occur setting us a background by the way where Citi does expect the Chinese economy to be doing better in the second half of the year and I think that’s going to be a very important catalyst as well.
Q: How do you expect Asia to do in this backdrop? Do you expect Asia to go back and break the lows that it made last year because of all this turbulence? Is that your base case or do you think it will not come to that pass?
Robinson: Our houseview is that if you look at valuations right now we are at about 1.5 times price-to-book. If you look at historically that’s below its median range and if you look at Asia it vacillates between 1 and 3 times price-to-book.
So if you look at it historically we are already fairly reasonable. We are not expensive at all. If we do get some kind of resolution in Europe and if we see that full rally, there is pretty good chance of it.
If you look at historically you have had about 70% chance from here of making money over the next 12-24 months if you have been buying at these levels at 1.5 times price-to-book.
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