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Mar 29, 2011, 09.29 AM IST
One of the big or most respected global thinkers, Russell Napier of CLSA spoke exclusively to CNBC-TV18 about how he is reading equities for the rest of the year. He says QE2 failed in its purpose to increase money supply in the US.
US Federal Reserve’s Chairman Ben Bernanke is looking to let its second quantitative easing (QE2) slated to end in June 2011 run out. At present, he has no plans to extend the bond buying program.
One of the big or most respected global thinkers, Russell Napier of CLSA spoke exclusively to CNBC-TV18 about how he is reading equities for the rest of the year. He says QE2 failed in its purpose to increase money supply in the US. “This may not be a great bear market for America but this reflation is in trouble and QE2 is ticking away.”
While the Japanese triple whammy has not left a lasting impact on global markets , he says the collateral damage due to Japan may be limited and will not be long lasting. “Events arising out of Japan may impact stock markets positively,” he says.
On emerging markets, Napier finds inflation and asset bubble formation, major concerns for these economies. He has a cautious approach to emerging economies as of now.
Below is a verbatim transcript of Russell Napier’s interview with CNBC-TV18’s Udayan Mukherjee and Mitali Mukherjee. For the complete interview watch the accompanying videos.
Q: US equities were up 3%. Are you expecting turbulence in the second half from hereon later in the year or do you think we will be okay because the US has been the big outperformer so far?
A: We have to begin with what US equities are pricing in and at this level of valuation there is clearly a change since last year. People expect growth and they expect inflation. They expect effectively that QE2 has worked. There is significant evidence that it has failed. It has failed to increase the supply of money in America. We have less money than we had in November; we have less money than we had in March 2009, because of the real estate trouble. This may not be a great bear market for America but this reflation is in trouble and QE2 is ticking away.
Q: What will that translate into in terms of market performance? Would you say there is significant downside risk for a market like the S&P and the Dow?
A: The problem all investors have today is they are not estimating supply and demand anymore. We are estimating supply, demand and government reaction to supply and demand. To be more optimistic on the American market going forward we have to contemplate what government action comes next.
In terms of what we have experienced for the last year or so, the word QE3 will be used and that is going to be extremely politically difficult in the US. We have to wait until we see what things pan out; we have to wait to see whether we get a political agenda to move forward with QE3. It would be nice to tell you what month, what quarter the markets going to bottom up but when there is so much reliance on government and central banking action, the best thing is to wait and see how that shapes up.
Q: If you do foresee a drop in US equities, how much collateral damage will that have on global markets?
A: I don't actually think it will have that much collateral damage primarily because we have this huge event in Japan which is creating a major economic stimulus in Japan. We have a strong German economy which will also be put into a higher gear by what is going on in Japan. It is not good for global growth, in aggregate if America has a sudden setback.
What we are looking at is a fairly unique offsetting opportunities coming along in other major economies in the world. The setback will focus primarily on America. The collateral damage, particularly, for Japan will be limited, it really is in a unique situation today.
Q: Where do you stand on the emerging markets versus developed markets performance debate? Do you think EMs might start to play catch up after underperforming and may actually outperform the DMs for the rest of the year?
A: No. I am afraid not. The EMs have got some very big problems. The consensus says the central bankers there are attacking inflation and that is incorrect. The central banks are keen to bring credit growth down. The one thing that they learned from Alan Greenspan is that there is more to life than targeting inflation.
If you look at India for instance you got credit growth still over 20% and that is not going to be acceptable for a central bank. It risks an asset bubble and it risks the destruction of buying capital. Central banking has entirely changed and none of the EMs have really got their credit growth down to a level which they would actually like.
I would be nervous about getting involved in an equity markets or any asset market where the central bank is still quite keen to bring credit growth down and stop asset prices getting out of control. EMs have more than a cyclical problem here.
It is more of a structural problem because the nexus where the buying central banks will attack is property and commercial banking and they are heavily represented on the listed sector. We have a long way to go for the central banks and EMs feel that they can ease up and until then I would be cautious about being in the markets.
Q: Where does that leave India in the EM context? How do you expect that to do?
A: The thing about India is that the credit growth is very high and it is going to be a long time befor the Reserve Bank of India (RBI) gets it under control. I know everybody in India likes to think the RBI will be on the side of the stock market, helping to promote it.
But that is not the job of the central bank. The central bank's job is to produce conditions for higher levels of non-inflationary growth. I am afraid that bringing those conditions to pass over the next few years may involve bringing the stock market lower.
Q: To focus for a bit on an issue that’s gone back of mind, is the situation in Japan. What kind of impact might that have, on global economy and on equity markets?
A: Events in Japan rather unfortunately are actually very positive for the stock market. There are two key reasons for that. We all know the medium-term positive impetus for GDP growth but much more importantly than that we are now seeing the conscription of the Bank of Japan (BoJ) which has held out against the government for many years refuse to monetize the government debt and now I think it really has no option.
It's an issue of national service to buy government debt, to promote growth and try and allow the government to finance the recovery. That is the most important thing for global financial markets. It should be more positive on growth and in the longer run, it should be more positive on inflation because the BoJ is going to be following policies that we have seen in the United States of America. That is the global impact, is to bring BoJ in to the global reflation play because I really think they have no option.
Tags: US federal reserve, Ben Bernanke, Russell Napier, CLSA, Udayan Mukherjee, mitali mukherjee, emerging markets, US equities, S&P, Dow, RBI, QE3
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