Global equities to be bearish in near-term: Aussie Bank

Even as markets are set to rally, Nick Parsons of National Australia Bank has doubts on its sustainability. "Ultimately, I think we are set to test lower during the rest of this quarter. Not just in the developed markets in Europe, United States and elsewhere, but that same sentiment is really dragging down the EM universe too. So we don’t see this as anything more than a very brief respite," he said.

In fact, he remains bearish about the near-term outlook for global equities.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
 
Q: How is it that we are seeing a decent amount of green on the European stock markets? One would think that with the messy situation in Greece things would be very uncertain?

A:  Markets don't always move continually in the same direction. There was actually a rare glimmer of good news today from Europe. We had German GDP figures an hour ago, which showed growth of five times the market estimate. Consensus was looking for growth of 0.1% on the quarter. We actually got 0.5%. So this was a rare bit of good news showing that for all the trouble around the single currency, there are still pockets of real strength within the European economy.

Bear in mind, in some time, we will get the eurozone GDP numbers. Though the market has braced itself for a fall, those German figures gave a glimmer of hope that we might actually feel flat on the quarter. So it's not just a short covering rally, it’s been driven by a bit of better news.

Q: Do you think the German positive surprise has stolen the thunder and it’s likely that even if we see the consensus 0.5% contraction, the markets will not react negatively?

A: I think the markets are set for a good day today. But, I have got considerable doubts as to whether that will be a durable feature. I think we will see odd days where the markets rally. Ultimately, I think, we are set to test lower during the rest of this quarter. I think that's going to be the same. Not just in the developed markets in Europe, United States and elsewhere, but that same sentiment is really dragging down the EM universe too. So we don't see this as anything more than a very brief respite.

I am particularly bearish about the near-term outlook for global equities. I see no reason to change that, not withstanding the fact that we get occasional up days.

Q: You had said that perhaps the exit of Greece is not only inevitable but also good for what will be left of the euro using currencies and their economies. What's your view on the way things might pan out till the exit of Greece? Can it really be managed without being too disruptive? Is there a lot of messiness that you see in the run up to possibly an eventual Greek walkout?

A: You are absolutely correct. It's very difficult to see it being anything other than disorderly. Even the very best case scenario will involve a lot of volatility, a lot of disruption, lower asset prices and very real and grave concerns about the knock on impact of a Greek default and exit.

Of course, the debt that Greece would repudiate in that set of circumstances is actually owned by someone else. Largely, that someone else is the European Central Banks, National Central Banks across Europe, because of course the commercial banks, the private banks have been trying to get rid of it as quickly as they can.

It will be hugely disruptive. There would be real concerns about contagion spreading into Portugal, Italy and Spain. Even if it goes as well as one could possibly hope, it doesn’t mean to say it will proceed smoothly without disruption for financial markets.

Q: Given the kind of contraction that we have had across the eurozone economies, do you think you can afford such a disorderly exit? The ease with which Germany has been saying that EU has done the utmost for Greece and there is really no scope for leniency, do you think it is possible that they allow such a disorderly exit at a time when the economy was suffering quite a bit?

A: We have long argued that Greece is not going to be forced out by the rest of Europe. As you rightly mentioned, it will be hugely disruptive and there will be fears of contagion. But the transmission mechanism, the cause of events is not that Greece is forced out, rather that Greece chooses to leave and democracy is a very messy process sometimes.

If the will of the Greek people as expressed in the second round of elections is not withstanding all those difficulties that lie ahead, if they wish to remain a sovereign state and in charge of their own destiny, if the Greek people choose to leave, then so be it. There is nothing that the rest of Europe can do to prevent it.

That's why we have seen this acceleration to the downside since the Greek elections. It’s not because Germany or France is forcing them out. It's because the Greek people have taken a sovereign decision. Apparently, they are unwilling to stick with the agreement that they have previously reached.

Q: Do you think it’s increasingly likely that the Syriza party comes to power and Greece forces itself out of the eurozone?
 
A: Yes, I think that is likely. As recent as a month ago, there was a 40% probability that Greece would just about stick together within the eurozone. We now think that the balance has just shifted over the 50% line. And on balance, the likelihood is that it will probably exit. It’s certainly not a 100% done deal and I know some banks talking about 75% probability. We wouldn’t put it quite as high as that.

But it would appear that on balance, taking into account all the developments over the last four or five months within Greece, including its default earlier this year, that does appear to be the will of the people. If it is the will of the people then there is nothing that the rest of Europe can do to stop it.

Q: From our own little cocoons in India, what should we be prepared for - a wave of further risk aversion, a flight of dollars away from equities and currency?

A: We have already seen that in the currency. This morning, we got to a high earlier of 54.07. Talk that the RBI was intervening is of course unconfirmed at the moment. But the price action was consistent with intervention. Let me put it no more strongly than that.

The level that they appeared to have been defending was the high that we had seen back on December 15 2011, when we got to 54.30. I think a rally in the Indian equity market is not possible and unlikely to be sustained unless we see a turnaround in the currency. There is no sign yet that international investors want to have long exposure to the rupee.

Q: Is your sense that the rupee has fallen intrinsically enough? Usually central bank action picks up when probably by the REER (Real Effective Exchange Rate) terms, especially with its 36 trading partners, it believes it has fallen enough and adjusted to the domestic inflation increase. Do you think it has fallen enough?

A: I read that in its quarterly bulletin. The latest RBI bulletin has got a very helpful table of all the measures of REER. But, I think it is a feature of markets that they do indeed overshoot. We tend to find turnarounds, not when we get to fair value, but when we have gone through fair value.

In other words, we can make the claim quite convincingly that here something is cheap. At the moment, if we are looking at fair value on REER measures, that’s one thing. But, we are not at the levels that would say that frankly, this is a no-brainer that you must buy it, because experience shows that things get absolutely cheap before they rebound.