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Jul 12, 2012, 08.23 AM IST | Source: CNBC-TV18

Euro debt crisis to get murkier; play safe, says Hennecke

Martin Hennecke of Tyche Group believes there is still ambiguity around the outcome of the EU Summit. The EU policymakers have said that the European bailout fund can bailout the banks directly rather than bailing out only sovereign countries.

Martin Hennecke

Associate Director, Tyche Group

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Martin Hennecke of Tyche Group believes there is still ambiguity around the outcome of the EU Summit. The EU policymakers have said that the European bailout fund can bailout the banks directly rather than bailing out only sovereign countries. However, Tyche states that they don't have the money needed to bailout all the banks.

In an interview with CNBC-TV18, Tyche said, "Asia is a better place to invest in gold and silver. It's the safer place to invest than eurozone bonds or the same as in the US and UK; they aren't looking much better."

Investors should tread with caution given the volatile market swings, he advises. "Western countries could go deeper and deeper into the debt crisis affecting the larger and larger countries. So staying safe without any form of leverage in short term speculation is the safest strategy in our view."

Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.

Q: What were the key positives with respect to the EU Summit? Do you expect these gains in the European markets to continue?

A: First of all, with regard to the European Summit, nothing has been fixed at all. What they say is now the European bailout fund can bailout the banks directly rather than bailing out only sovereign countries.

First of all they don't have the money needed to bailout all the banks. It is far too small so the next question will then be how are they going to increase the size of those bailout funds? If you are looking at the balance sheet and the debt level of France and Germany, they are the only countries who could possibly fund them.

They are struggling with their own debt crisis now so where is that money going to come from? There is only two options, either all of it will collapse; the banking system will collapse, you face national bankruptcy of Spain, Italy, France maybe even Germany or they prevent that Armageddon collapse from happening by massively ranking up their money printing and that's probably the most likely.

What they are going to do is just let the ECB print nonstop at some point. This means very high inflation, so from an investor perspective, it needs to be clear; nothing has been fixed at all. Still could ease over the alternate short term deflation or collapse or very high inflations, so you should still stay clear of the euro, of euro zone bonds.

Although stocks, to some extent, do represent some real type of assets that can have an effect on inflation. One needs to see if there are some companies particularly with good sales to Asia or good technologies, it may still be brought by earnings but overly Asia is a better place to invest in gold and silver. It's the safer place to invest than eurozone bonds or the same as in the US and UK they aren't looking much better.

Q: What you have made of money printing in terms of euros being printed? Once this risk-on starts a bit, the big worry for countries like India is if commodities start flaring up again, in particular crude. Do you see crude going back; for instance, Brent is already up from probably USD 89-90 per barrel to USD 92-93 per barrel at this point in time dollars per barrel. Do you see it going above USD 100 per barrels quickly, does USD 120 per barrel become a reality in 2012 itself or are we looking at very different growth parameters now?

A: One thing that should be said is for India or Indians it wouldn't be all that bad if commodities were going to soar because Indians hold a lot of gold and silver. If gold and silver saw a bag up again that would be at least good for those who have been protecting their wealth and those precious metals. So, it wouldn't be all bad if that happens.

Gold, in rupee terms, has been holding up even relatively well. Though in economic terms oil much more tricky to say in terms of how much reserves really are there, how it will really wreck to inflation, oil is a much more tricky picture than gold where it seems to be relatively certain, underground it is really getting much scarce and running out.

For oil, there is a lot of conflicting information on that side so we aren't quite certain where oil is heading. From an investors perspective though, if one wants to hedge a portfolio against the risk of rising oil prices, let's say if you hold some Asian equities so one way to hedge against that risk is, for example, buying some Russian Energy companies because they are quite cheap.

Even if the oil price doesn't significantly rise, if you hold some oil and natural gas companies in Russia at the current low valuations that maybe bit of a protection from a portfolio point of view. But you would still be seeing substantial amount of caution, quite volatile market movements upcoming as the western countries could deeper and deeper into the debt crisis affecting the larger and larger countries. So staying safe without any form of leverage in short term speculation is the safest strategy in our view.

On the other hand, don't hold everything in cash because of inflation; so keep a mixed asset base but there is no leverage.

Q: How do you expect the equity markets to move from hereon because generally they do react to higher liquidity? If you think printing money is going to be the way out of this, how do you expect the equities to react?

A: That is a very good point and if they do print money, actually then this crisis of hyper inflation or very high inflation from the west that may indeed bring equities up because equities atleast represent some form of tangible assets whereas bonds and cash only represent the promises. So equities generally may not be the worse thing to hold and many markets represent quite reasonable value.

We would be a bit higher though or doesn't make show of us one has good solid exposure to the precious metals for gold, silver for crisis protection. If you have another temporary market drawdown, which can easily happen then it is a bit more balanced and maybe some bonds. Some Asian bonds are not too long-term though. The yields by the way Spain cannot afford to pay 1-2% on their debt. They are already broke. So this crisis is first going to come back and it will get worse.

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