Mar 23, 2012, 08.53 AM | Source: CNBC-TV18
The global risk has every chance to remain intact, says Gary Baker (BoFA Merril Lynch) given what the ECB, Fed and recently Bank of Japan have done for the economy.
He believes that apart from the oil price playing an important part the European risk is dependent on the elections not only in Greece but mainly even in France. He also feels that there is no funding risk left for banks arguably for the next 2 years after LTRO 2 and the ECB is really committed to be the lender of last resort for the banking system across the eurozone.
He doesnít think that the QE2 is ruled out completely and the Fed will resort to it if need be. Though India is attractive on structural growth for FIIís, in the near term it is losing out to countries like Russia due to the Budget not having been aggressive enough for the investors.
Below is an edited transcript. Watch the accompanying video for more.
Q: Do you see this very good start to the year continuing with global risk remaining intact?
A: I think there is every chance it can. Everyone has just sort of assumed that it has been liquidity driven and thatís clearly been a major factor for what the ECB has done or the Fed has done and recently Bank of Japan as well. However, there are quite a few signs that economic indicators themselves have started to pick up and a combination of both of those, if we see that trend continuing then there is no reason why the equity rally canít continue.
Q: The S&P is already at 1400. How much higher do you see it going from here?
A: We havenít got much upside remaining on our official forecast. What it would depend on is to see earnings up with surprises and revisions. The various factors which sort of play into that as to where the oil prices go. So to really upgrade numbers in terms of overall index targets, that is what we are really looking for in the US.
Q: Is the European risk off the table for now or are you still looking at certain metrics which will tell you that you need to start getting cautious again?
A: I think the main ones that we have to be aware of, apart from the oil price is really on the election front. You have got Greek elections coming up which may or may not be important given what has already happened in Greece. But the French election at the end of April early May is certainly going to be important in setting the scene really. Whether there is going to be a new relationship struck between Germany, France, ECB, and Europe more widely or whether you are just going to get a continuation with Sarkozy being re-elected.
Q: In the near term how are you reading liquidity flows into emerging markets? Do you think LTRO 2 has done the needful which keeps liquidity benign for the next many months?
A: No. I think it has worked extremely well. It has totally changed the arguments on banks. By the end of last year banks had very severe funding problems, liquidity issues and in our view the LTRO 2 following on from what happened in December has totally changed that. So there is no funding risk left for banks arguably for the next 2 years and the ECB is really committed to be the lender of last resort for the banking system across the euro zone. As such I donít think itís just acted in a muted way, itís been very profound. But where you have really seen the full effect is more in credit markets and equity markets.
Q: What about liquidity now from the US? Should you be ruling out possibility of QE3 or should one not shut the window completely on that yet?
A: I donít think its ruled out that completely and I think the Fed has been very keen to make sure that it doesnít come across as having ruled it out completely. We have had a fund managers survey yesterday and one of the questions that we asked was what is the likelihood that of a further QE from Fed and also ECB. There is no doubt that more investors are now thinking that perhaps itís not going to be required. Central banks have been in pain to say we will continue to support the situation as we see economic data develop. So I think the fed is still there if it needs to be.
Q: So what is the mood on a country like India now which has been recipient of fairly generous FII inflows over the last few weeks and months? How would you sum up mood on India?
A: Ultimately people are still interested in India as a structural growth story but the budget I think has disappointed some investors as to it wasnít aggressive enough. Is it really setting the target that people want to see achieved? Against the backdrop of comparisons to other areas like in countries in Russia where people had been worried about the political risk premium ahead of the elections there, with elections now out of the way, given the energy situation and attractions of Russia we have certainly started to see some flows change. That is certainly not coming out of India but on a relative attractiveness basis that sort of comparison EM investors are trying to make and I think thatís why India at this point faces quite a tough situation in terms of what that near term outlook is.
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