Major central banks to cut rates in next 6 mths: Baring AMC

Here is a verbatim transcript of the exclusive interview with Kheim Do on CNBC-TV18. Also see the accompanying video.

Q: What do you expect Asian equities to do if this bailout package goes through?

A: We think this bailout package will go through and that it will help to some extent, but it won't solve all the problems because obviously it has a lot to do with the housing sector in the US, Europe, the UK, and many other parts of the world. We will see more reflationary measures especially from the European Central Bank. It will cut rates aggressively over the next six months. We had some signs yesterday that Jean-Claude-Trichet is prepared to look at reducing interest rates in Europe. Once the ECB cuts rates, then other central banks around the world will also hopefully join in. The Fed will also continue to cut rates as also the Bank of England, the Reserve Bank of Australia, People's Bank of China, and perhaps India's central bank.

Q: What kind of pressures are you still seeing in terms of redemptions from your investors in the West and the Far-Eastern markets? Do they continue to pull money out of Asian emerging markets?

A: The data that was released by a number of houses suggests that there has been about USD 60 billion worth redemptions from all investment management houses the world over. As far as Barings is concerned, we are seeing a little bit of redemption activity but not much and we hope that this trend continues. Our funds have been in existence for a long time and we have some very loyal investors who believe in the growth of Asia. From our viewpoint, the redemption activities so far have been very mild.

Q: It's been a tough year for Asia though and some of the bigger markets like China and even India have been battered quite a bit. From these prices, given how much damage has happened already this year, which are your favourite markets in Asia?

A: We think that Asia as a whole is trading at about 11.5 times current earnings at the moment. This is based on current earnings and not on expected earnings. Asia is still growing. There could be a technical recession let's say in Singapore in the next quarter but that is a serious problem because the banking system in general is very healthy. China, India, Korea, and Taiwan - most Asian economies - are growing, even though earnings per share have declined somewhat this year as a result of the global turmoil. But 11.5-times valuations have factored in a lot of that bad news. Some of our favourite markets continue to be China, India, and number of smaller markets in Asian blocks. That includes Thailand, Indonesia and Singapore.

Q: There were concerns that there was forced liquidation for many funds and they had to actually shut down. Is that something that you are hearing of occurring; is it Asia-specific or BRIC-specific funds?

A: In the long-only mutual-fund area, unless a fund manager runs a small-cap portfolio that is difficult to liquidate, they may have issues in terms of meeting those redemptions. As far as our funds are concerned, we have been investing in very liquid large- and mid-cap type of companies. Also, the liquidity problem rests more with the credit side or with portfolios that have a lot of those either unlisted types of business assets or smallcaps. Those are not what we have in our own portfolios.

Q: We are nine months into the bear market. How much longer do you see this market across the world or in Asian equities lasting?

A: The central banks and governments have started to show a lot of concern about the slowdown in economies and that is a good sign because the leading indicators have already started to deteriorate since last year. In addition to the falling leading economic indicators, we also have the banking problem in the US, UK, and Europe. So, this is a double problem, not just one single cyclical economic downturn like what we saw in past recessions. We have a combination of a malfunction in the OECD, or Organization of Economic Co-operation and Development, banking system together with recession. So, that is why it has been a bit longer than usual this time.

This kind of volatile environment is perhaps likely to last for at least another three-six months and there could still be a bit more downside in some markets. But if we see Asian markets falling by another 10% from these levels, it would present a fabulous bargain for long-term investors.