Jim Walker warns 2012 will see worse from Europe

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Even though global markets seem to be coping with the debt crisis, Jim Walker, founder and MD of Asianomics is very worried. According to him, Europe's worst is still ahead.

In an interview to CNBC-TV18, he warned that the European markets are unlikely to hold given the recessionary trend and 2012 will see the worst situation there. He added that the markets are just supported by the European Central Bank (ECB) liquidity injections. On Monday, Greece passed the austerity measures amidst protests.

However, there is some good news for the emerging markets. Betting on the emerging markets, Walker said that these countries are likely to outperform in 2012. The US, too, may show signs of improvement, he added.

Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying videos.

Q: Do you smell that this liquidity rally has more legs?

A: Like we've been saying in the past, it's all linked to liquidity; every time they inject new liquidity the rally has fewer legs than the last time. This whole thing about long term assets being injected by the ECB, it's just the same solution as we have seen over the course of the last four years. Pour liquidity into the fire and its gasoline that your pouring in.

It actually doesn't get better. All we have done in the course of this liquidity rally is give European banks money at 1% and those banks are running to buy European government paper at 3-4%. So they haven't recycled any of it into the private economy, they haven't recycled any thing into the real economy, part of the economy that actually grows and makes money.

So they haven't solved any of the problem what so ever. With banks continuing to delve into government debt, buying those bonds, retrench from the private sector, the austerity measures go into place and the bank deleveraging go into place, I am afraid we will get the mother of all recessions in Europe which then is going to turn into a much bigger mess than we have had so far. So we are far from the problem solved but certainly the liquidity in the short term keeps things floating along; everything rises when the tide comes in, doesn't it?

Q: Do you get the feeling that the liquidity in the global markets and perhaps monetary easing could support us at least in the near-term and how will you map the second half for India?

A: I think in December it was pretty clear that the Indian market was oversold and much clearer that the rupee was oversold. So I am certainly not surprised that we have seen a rally over the course of the last two months. We recommended to our own clients that they should be buying a fund in Hong Kong which was an ETF on India placed in dollars particularly we were looking to take advantage of the oversold rupee. So we got a good 20% run on that.

The last week we were advising clients to actually take profits given how much the market has moved. I don't expect the market to fall back, particularly strongly till the 16,000 level, but I think it's going to be harder and harder from here to move forward. The money has been reallocated, it's been deployed and I am not really sure that there is much to follow through.