Equity rally in European markets may steam out: Rabobank

There are risks that the political challenges may crop up again as the political situation in Greek is very complicated and it may take stream out of the equity rally.

Below is the edited transcript of his interview to CNBC-TV18.

Q: European markets have already put in substantial rally behind them. What are investors now talking and thinking about the next way for the equity markets?

A: I think the investors did read the ECB wrongly. Last Thursday, there was negative reaction on the absence of any concrete policy measures. On reflection it does look that the ECB has put a bit more rational. That has clearly emboldened investors.

In the last three days, we saw a 7.8% rally in the euro stocks 50, it clearly emboldened investors around Europe. If we get some positive news out of Europe, investors will react very favourably towards it but then we have the complicated political mechanization that underpinned the euro zone's ongoing challenges.

There is a risk that they may pop up again. The Greek political situations are very complicated. I am expecting some bad news coming back on the radar and take the steam out of the equity rally.

Q: Over the past month smart money has bitten into equities a goodish bit because of the faith in central banker; we have seen this rally even in the S&P and in the US indices. Is there more leg to this equity purchases that we are seeing?

A: For the first time in quite a few months, the S&P 500 is back above the 1400 barrier. The US economy saw a weak path in the second quarter of the year; employment growth was up 70,000 every month on an average through the second quarter.

The start of the third quarter is better. So, I think the US economy will grow a bit better in the second half of this year compared to first quarter, this will provide bit support to investor sentiment and corporate dynamics.

Q: How are you looking at the Indian equity scene now with crude above USD 112 mark?

A: An interesting balancing act is going on in the mind of investors with the Indian market. When we see an upbeat or more supportive global growth indicators there is a signpost that indeed India may do quite reasonably well because India has been a high-beta market on global indices for last two years.

But of course on the flipside, the rally in oil prices is a negative. So it is a difficult balancing act. There is a political overlay with the new finance minister that's being quite favorably taken.

I think whether Indian markets might be at the same risk as the European markets. A lot of good news had already priced in the last few sessions. The risk is that a little bit of disappointment may seep in at these levels.

Q: Do you expect the money flows to continue into markets like India?

A: It depends on the whim of the European politicians. India with a structural current account deficit and a heavy reliance on portfolio capital to fund that deficit rather than foreign direct investment and portfolio capital well and truly incumbent at times of stress in the European banking system.

So it's a highly cyclical factor. Good news from European tends to play out quite favorably through Indian markets. Bad news in Europe or rising challenges, tensions escalating tends to play negatively. A lot of good news has already been priced in some of the recent sessions.

Q: All asset classes and markets have been moving extremely ranged in the past several months. If you have to bet for a year now what would be your best bet in terms of an outperforming asset class?

A: If the European policymakers do step-up more concrete measures in the next couple of months then European financial stocks may have a bit of a leg up in year end because they have been beaten down a lot.  I think the European financial stocks might surprise into year end.