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Jul 12, 2012, 08.23 AM IST
Going into the EU summit, expectations were low and Robert Parker, Vice Chairman of Credit Suisse Asset Management expects clarifications on the bail out coming through. In an interview with CNBC-TV18, Parker said that till now, market participation has been very encouraging.
Parker also believes that another round of LTRO will be introduced by the ECB in July. The Fed can also resort to some quantitative easing in September. He also anticipates the price of Brent crude holding in the range of USD 90-100/bbl in the near term.
According to Parker, the Indian market environment is positive for the moment and he is hopeful of an Indian market rally beginning in Q3. He also considers global stabilization in commodity prices a positive for India. Besides, he draws attention to the various problems persisting in the Indian market and feels that they must be addressed.
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: There have been a raft of measures to alleviate the pressures in Europe, but do you think that is enough or do you think the structural problems will creep up and this initial euphoria will be short-lived?
A: The market reaction so far, in Europe today has been very positive and that's against the background. If you and I were having this conversation yesterday, I would have said that expectations going into the EU Summit were very pessimistic. To some extent the rally that we are seeing today is a reaction to that negative market background that we saw yesterday.
The short-term problems obviously were pressure on the Spanish banks and the fear of contagion to the Italian banks and particularly, in the sovereign bond markets. The upward pressure that we were seeing was always weak on Spanish and Italian bond yields at one stage yesterday. 10 years Spanish yields obviously reached close to 7%.
The action has been in and out so far. Obviously as the day progresses in Europe, we will get more detail. But, I think what we have seen so far, which is to encourage market participants is a less onerous condition on lending and recapitalising the Spanish banks. Then I think there is a high probability that we will see clarification of the bailout from the EFSF coming in as a potential buyer of Italian and Spanish bonds and for that matter the bonds of other stressed countries
As we all know, there is a very high correlation between modern equity market movements and Spanish and Italian bond yields. Today, we have seen Italian bond yields come below 6%. We have seen 10 years Spain come down to close to 6.4% from 7%. That correlation between the stresses and the sovereign bond markets in European equity markets has remained nearly perfect.
Of course, it's against the background of global investors sitting on a very significant borrowing of cash. We are seeing short covering, we are seeing some cash going into the markets. I think this rally probably continues at least into early next week.
Q: So how much more upside would you give the market if the rally does continue onto at least early next week?
A: I think if one takes a view, it would be over July and August. I think global equity markets could easily see a close to 10% upside and the downside now is very low. The rationale is to aim at number one.
I do think that a quite serious action finally has been taken by the Europeans. Obviously, a lot longer term problems still needs to be addressed and particularly, the growth agenda for Europe and whether the fiscal pact be implemented intelligently or not must be addressed.
These long-term problems certainly have not gone away and obviously, later in the year, after Greece has been given it's 6-months breathing space, there is still a risk that Greece gets forced out of the Euro in early 2013, which has always been my view. But, I think in July and August, we will have one of the equity rallies in high level of investor cash valuation cheap.
I think one very significant factor will be a further round of monetary easing. In September, we could have QE3 from the Federal Reserve. In July, I do think we will get an interest rate cut and another round of LTRO from the European Central Banks. What is already an easy monetary environment will get easier and that will underpin global equity markets.
Q: What about the Indian markets because there are many brokerages that have now become positive on India? Again, if this risk-off sentiment continues, it could spur a movement in commodities as well, maybe crude could go back up and that will not be a good thing for markets like India. How would you approach our markets in the near-term?
A: I think the first point is crude will go back up. But I don't think it's going to go back up very much. Obviously, Brent is one's benchmark and I would assume that we will hover in a range between USD 90-100 per barrel. It is a good news for India and that's in contrast to where we were back in late March when Brent was a trading above USD 125 per barrel.
If we stabilise in this range of USD 90-100, that's positive for India. I think a stabilization of other commodity prices is also positive for India. The easier monetary environment globally is a positive for India and let's not forget that 6-9 months ago, you had what I regarded as an overvalued currency.
Now you clearly have an undervalued currency and that is a positive for the export sector. Yes, there are still a number of issues which needs to be addressed in the Indian markets, but the monetary environment, the commodity environment, the currency situation all of which was somewhat negative for the Indian markets in March-April and May have now turned positive.
As a result I think India would have a rally starting in Q3. I think that rally is starting now and India will participate with global markets over the next 2-3 months.
Tags: EU summit, Robert Parker, Credit Suisse Asset Management, market, Brent, crude, Fed, LTRO, ECB
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