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Jun 22, 2012, 03.49 PM IST
With all the tailwinds in the air, Adrian Foster, Financial Head Research, Rabobank is still bullish on emerging markets. He sees scope for outperformance with a burgeoning domestic demand story rolling right across the landscape for emerging markets.
In an interview to CNBC-TV18, Adrian Foster, financial head research, Rabobank is still bullish on emerging markets. He sees scope for outperformance with a burgeoning domestic demand story rolling right across the landscape for emerging markets.
With our rupee touching an all time low of 57.30 today, Foster says there clearly is downward pressure on the currency and it is back to this strategic issue - that India has got a current account deficit, it relies on portfolio capital to fund that deficit, global finance is stressed, it is not in a very healthy position to go providing that portfolio capital.
“The challenge for the policy makers is to very quickly make the FDI landscape a lot more accessible to foreign investors. There is a lot of appetite for India but I think it is very hard for a lot of foreign companies to get in, in an FDI sense,” he says.
Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.
Q: It’s the commodity cycle which is becoming interesting. Is the commodity super cycle over? How are you looking at commodity prices this year itself? Will the early 2012 highs at least be reached or are we going to see only further falls?
A: I do think it’s worth keeping in mind that commodity prices through the last 12 months had been at exceptionally high levels. I am actually a believer in the commodity super cycle in broad terms, but you need to be careful in just thinking about what that means. It means that commodity prices stay elevated due to the shifting in global demand towards the emerging economies which do continue to grow at quite a reasonable clip.
So they remain uncomfortably high for much of the developed economies. Of course lackluster demand conditions, high commodity prices, high energy prices act as a bit of a break on growth in those countries. But the commodity super cycle has never meant to me that prices just continue rising. That’s completely unrealistic. We have certainly backed off the highs. They were at very, very high levels through the last 12 months depending which commodity you are looking at.
Now we have come down to perhaps more reasonable levels. Perhaps a little bit further weakness through this year because demand conditions are not looking to flashy in any particular economy and of course there is a supply response kicking in. But I think they will still stay in the upper half if you like of their sort of decade range.
Q: There is still some talks about European Financial Stability Facility (EFSF) which is planning to buy the peripheral bonds. What is the expectation now in the markets with respect to help for the euro zone now?
A: It is a bit unrealistic to expect any one-off tidy outcome. I don’t think Europe is at that point yet where people are prepared to give up their home grown political issues if you like and act in the greater good of the eurozone, I don’t think we are there yet. Looking at Spain, of course we saw government bond yields above 7% limit levels through the last two weeks. It was very uncomfortable for Spain after the banking support package was announced about two weeks ago; they have come back from those levels.
So I read it as there is still a residual support for government bond markets coming from the ECB’s LTRO back in December and February. Of course it is a trillion euro pumped into the system much of that is still sitting on the ECB’s balance sheet on deposit but slowly I think continuing to trickle out.
What we have been reminded of yet again though is when European policy makers come up with packages but are very light on detail, investors are very skittish and nervous and uncertainty is counterproductive in terms of calming markets and that is exactly what we saw with the support package for Spanish banks through the last two weeks.
Q: A fresh wave of bearishness appears to have been unleashed post the FOMC statement. least Wall Street dithered on the first day after the statement, but yesterday there was fairly a seminal fall with additional data not supporting. What is the hierarchy of the asset classes now? Would you start shunning US equities? What would be your top three asset classes?
A: The FOMC extended Operation Twist. So they are going to continue to sell short dated bonds, buy longer dated bonds keeping downward pressure on the longer dated interest rates. I have always thought this QE is not a particularly powerful policy tool. I do think periodically the markets overstated the potential impact of these QE policies.
So very timely - jobless claims, the Philly Fed and a new manufacturing sector PMI for the market, all three of them on the weaker side. So there was a loss of momentum in the second quarter, warm weather and poor forward growth in the US in the first quarter, the negative out of the overnight data, that weak patch continued right through the second quarter, right to June. It sets up the third quarter on a weak note.
In that sense, I think optimists on the US economy are continuing to be confounded by the data flow. We saw the US Fed revise down their forecast for the third up day in a row. The US economy does continue growing, but it grows at about the 2% rate and it’s very hard to get much spark for markets out of those kinds of growth rates.
Q: Where do you stand on the emerging market versus the developed market equation? Which one do you think is likely to outperform in the medium-term?
A: I am a strategic bull on emerging markets. I think there is clear scope for outperformance with a burgeoning domestic demand story rolling right across the landscape for emerging markets. But we have been reminded again and again that in times of stress globally, it’s unrealistic to think emerging markets can outperform. They are a high-beta play if you like on the growth outlook, so of course they are in troubled waters just as global financial markets are.
When we look around, the US is just stuck in the 2% growth path; sort of 1.7-2.3% and I don’t see it getting out of that through the next 12 months. Europe of course has some pretty entrenched problems and to be honest in a year’s time if we sit down and talk again, we will still be talking about uncertainty surrounding Europe. So I don’t see much spark coming from that scope either.
If you make a profit in your investments, if you think see seriously about booking it rather than running it because with all this excess liquidity around we can get some very sharp moves in both directions and of course with the global growth outlook not looking too flash periodic rallies are less likely to be supported, more likely to be averse.
Q: The steep fall in crude prices is macroeconomic positive since we are a net importer. Do you think corporates begin to look attractive? The rupee at 57.30 now, it is a 1.8% fall comparable to the Brazilian real’s fall at least for overnight. What is your comment on both and does it make the market attractive?
A: Brazil is probably happy with the currency weakness and I am not sure that India is happy with the currency weakness. We have some Indian colleagues today, we have of course got a branch in Mumbai and we were discussing whether the dollar-rupee mark will get to 57 today or not and it went through about half an hour later. There is clearly downward pressure on the currency and it is back to this strategic issue - that India has got a current account deficit, it relies on portfolio capital to fund that deficit, global finance is stressed, it is not in a very healthy position to go providing that portfolio capital.
The challenge for the policy makers is to very quickly make the FDI landscape a lot more accessible to foreign investors. There is a lot of appetite for India but I think it is very hard for a lot of foreign companies to get in, in an FDI sense.
Jun 18 2013, 22:39
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Jun 18 2013, 22:39
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