May 25, 2012, 07.33 PM IST
As uncertainty hounds global markets, Manpreet Gill of Standard Chartered Bank says it pays to be defensively positioned within asset classes in terms of sector choice and company choice.
In her view, smart money should be holding a diversified portfolio that helps manage volatility. “Smart money should be looking to manage volatility as far as possible through alternative strategies such as holding volatility funds of gold over the very long-term,” he said.
Gill further added it should also focus on holding equities for the long-term, not only as a hedge against long-term inflation. “Ultimately, looking at higher quality companies, dividend paying companies that ensure that you still continue to get paid regardless of what happens given the amount of uncertainty,” he added.
Meanwhile, Gill feels that the Indian markets currently look oversold and he expects to see a bounce in the short ther.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: How are you viewing the developments that we are seeing in the European markets? How would you approach the equity markets now?
A: We are viewing European markets as being almost in a month of uncertainty, because the next obvious trigger point is what happens in the Greek election.
That will make the biggest difference on whether we have a coalition or a party that chooses to stay in the euro and abide by existing agreement or really seeks to renegotiate and move further towards helping Greece leave the eurozone. So that’s the environment we are in.
I think it’s a month of uncertainty ahead. We are looking at it in two ways. One is that it definitely pays to be a little bit more defensively positioned, maybe not so much across asset classes, but definitely within asset classes in terms of your sector choice and company choice.
But having said that, unless you believe there will be a catastrophic outcome, many markets are at levels where it may start paying to begin averaging in.
Q: Equity markets world over have reversed the short-lived optimism that we saw in the first part of the year. What is your sense for the second half of the year? Do you think we have seen the best already and it may just be a petering off of equity markets or do you think there could be a revival towards the end of the year?
A: There is a possibility that we may see a revival. But a lot depends on the kind of policymaking environment we end up in. For example, if we do end up in a situation in Europe where the ECB is forced to step in with further monetary easing as maybe the case if Greece heads towards the exit, that would be positive for risky assets and most equity markets worldwide, albeit after a short period of volatility.
But even if we don’t go there, if Greece chooses to abide by the agreement and instead push some of the problems down the road by another year or so, that may not be as starkly positive as a monetary easing policy situation might be. But clearly, that would support continued muddle through environment. Markets would ultimately move higher if not quite as fast as if they were supported by policy.
Q: Is the street pricing in a possibility of joint euro bonds, which a lot of people are talking about? If that comes through, what kind of a relief will it provide?
A: I wouldn’t say the market’s quite pricing that in, because there is just so much uncertainty around whether that’s actually likely to occur. The only extent we have seen a support of eurozone is project bonds, which are ultimately going to happen in a very limited way.
A wider scale is supported by everyone except Germany. But clearly, Germany still appears to be against the idea and sees it more as an outcome of success rather than one of the inputs into the success. I think the key factor will be what the ECB does more than whether we go on the routes of common euro bonds. In our view, that will make the difference over the next month or so depending on what’s happening in Greece and whether the ECB policymakers step in, in a bigger way. Ultimately, they will most likely only if they are forced to.
Q: How would you approach the Indian markets amidst all of this, because not just the global chaos, we have our own policy paralysis issues to deal with. Do you think India is still a buy on dip sort of market or would you stay away?
A: I would consider a buy purely on short-term tactical grounds. Like most other risky asset classes globally, you could make a case that Indian equities are a little oversold. So the only silver lining in the rupee weakness is that for US dollar based investors. This means Indian equities look even more attractive than they would on valuation grounds alone.
Having said that, a large part of the weakness or risk appetite is likely to be driven by what happens with global risk appetite. If things get better in Europe, Indian equities are likely to do well. If things get worse, that would affect Indian equities, so you can’t get around it.
Ultimately, the two main concerns we have had which is of persistent inflation and lack of any big policy initiatives are still very much there. So I could believe in a technical bounce. But other than that, I don’t see any strong reason to move away from a neutral view on Indian equities.
Q: As an Asia strategist, what’s the advice that you would give? Where should smart money be chasing and what asset class?
A: At this time, smart money in our view should be holding a diversified portfolio that helps manage volatility. Smart money should be looking to manage volatility as far as possible through alternative strategies such as holding volatility funds of gold over the very long-term.
But it should also focus on holding equities for the long-term, not only as a hedge against long-term inflation. Ultimately, looking at higher quality companies, dividend paying companies that ensure that you still continue to get paid regardless of what happens given the amount of uncertainty. Those are some of the big factors.
We think that we are at a point in the markets where it makes sense to begin slowly averaging in. You never know where the bottom is, but when these asset classes are currently at levels where at least in next couple of months, it makes sense to start slowly re-entering the markets.
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