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Equities will not do any spectacular until there are some significant policy shifts, says independent strategist Mark Konyn.
“Overall, I think we would be hoping that some of these big macro issues start to ease in terms of their influence on sentiment,” he said.
Speaking specifically about India, Konyn says investors are caught in a hard place when it comes to investing in the country. “The initial reaction to the rate cut was positive, but then it was in isolation and not part of an ongoing easing and given that the fiscal deficit is constraining policy flexibility leaves investors a little bit in no mans land,” he explained.
Therefore, he sees foreign flows continue to lag for India.
Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video.
Q: How have you interpreted the events in Europe, especially chances that Sarkozy may not return and that political views of Hollande might create some kind of consternation? How will you prepare for the oncoming political events in Europe?
A: The hope is that the agreements that have been struck between Sarkozy and Merkel will survive any change in presidency in France. But until we see the second round of elections, that uncertainty remains. As a result, investors are going to remain somewhat cautious until they see the hard facts and how this pans out.
Q: Can we expect the correction to continue until the political uncertainty in Europe pans out, because today as well Europe has reacted with cuts of about 1-1.5%?
A: It’s being viewed overall as negative. On the back of last week we have also had some fairly mixed economic data where some indicators are suggesting things are improving, whilst others are suggesting that things are deteriorating.
In the UK for example, we saw better consumption numbers but weaker production numbers and that sort of balance of good and bad has sort of continued across the continent and indeed globally.
So I think overall we are in a situation where investors are somewhat cautious, but particularly so in Europe because it is seen as the main fulcrum of that agreement rests on the relationship with Angel Merkel and President Sarkozy. Clearly it’s the first time the president has lost outright in the first round since the late 60’s, so it is quite a surprise in terms of the outcome of the election so far.
Q: How are you looking at the equity landscape itself, are we going to see a risk off for some time now?
A: A lot of data is quite mixed. I am picking on China and I think it’s still the case that we are seeing the momentum being lost in the Chinese economy. We are seeing a tougher time in terms of growth and some investors are considering us entering a stagflation environment.
The key here in order for investors to regain their confidence is expectation of some monetary easing coming through. There was wide expectation of that as we work our way through the first quarter, but that hasn’t really been realised with any force and the risk now is that it will be put off towards the end of the year as the governments still deal with weak loan growth, the threat of inflation and generally a slower outlook for the entire economy.
You put that on in comparison with what's going on in the US; the corporate side still looks reasonably healthy, but we have had earnings that have been reported, have been generally above expectations.
Q: What is your guess of what may be the top three or four best performing assets and asset classes or country asset classes in the next couple of months?
A: Difficult to take a position against future policy moves. If you look at what’s occurred in Chinese stocks listed in New York in the last few days, they have staged some what of a bit of a short term rally. It’s probably the strongest rally since earlier this year in February because investors are trying to position the next bout of easing. But it’s very difficult to time to those situations very well. So I think in this environment you are going to see equities generally do okay, but nothing spectacularly well until you see some significant policy shifts.
We have got the Fed meeting this week. Of course we are looking for the summary points around that to see if there is any hint that we are going to see some easing. We have also got the BoJ meeting this week, which should provide we think some policy initiatives about future buying in the market, which should be simulative. But overall I think we would be positioning for a mildly improving environment and hoping that some of these big macro issues start to ease in terms of their influence on sentiment.
Q: How does India perform in an environment which you have illustrated? Is it likely to underperform perhaps the US markets and the other emerging markets because flows to India have completely dried up in this entire month of April?
A: Flows generally to emerging markets compared to earlier in the year have really lost momentum as we have worked way through the current month. Clearly India still has structural issues, which are tending to divert perhaps the incremental dollar flow away from India and towards other emerging economies.
We saw the surprise rate cut very recently and that hasn’t really done much for investors. The initial reaction was positive, but then it was in isolation and not part of an ongoing easing and given that the fiscal deficit is constraining policy flexibility leaves investors a little bit in no mans land. That isolated action is not been seen as doing much longer term., so I guess it’s more of the same for India, that flows may continue to lag.
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