West heading into a budget deficit crisis: Tyche Group

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In an interview with CNBC-TV18, Martin W Hennecke of Tyche Group spoke about his reading of the global markets and his outlook.

Below is a verbatim transcript of the interview. Also watch the video.

Q: Is there something game changing happening out of China after those red hot GDP numbers? Are you expecting that Chinese tightening is around the corner and if that happens then what happens to growth - both markets and economies in the emerging markets?

A: If China does more of the tightening and more measures to cool down the economy, the first thing to say is that its probably quite prudent that they are doing it unlike in the US where Allan Greeenspan was still encouraging banks to come up with these exotic subprime mortgages and encouraging borrowers and homeowners to go for the exotic features like various mortgages and so on. A lot of which is still going to be resetting over the coming years. So this crisis in the US is by no means over. Even the subprime crisis isn't over and now we are having a new crisis in the making in the western countries, which is the budget deficit crisis.

Yesterday, Obama endorsed a so-called new taskforce to deal with the US's budget deficit problems. But I don't see how they could possibly get it under control. Its 10% now of GDP - same is the case in the UK and a number of European countries - Greece is somewhere between 13-15% or even higher.

So we think there is still a big crisis out there in the west and by contrast China seems to be managing their economy very well. Everything have been doing to manage the fundamental competitiveness in the industry, infrastructure is doing well. So we are much more bullish on the eastern countries than in the west.

Q: Whether its the US or the Indian economy - a large part of the private economy is actually in the markets, which means you can find a direct connection between economic recovery and what happens to the stock markets. Now in China there is a stock market but most of the companies are not on the stock market. They are either government-owned or outside. Is there really any correlation between what can happen to Chinese stocks and what can happen to the economy because about for 9 yeas the Chinese economy grew and the market fell by about 50%? Is there any real correlation or its more of a speculative market anyways?

A: That is a very good point. Not just in China, but also in the US. The question is that if the economy is bad or the economy is good what does it actually mean for the stock market. For US, I don't necessarily say that we might see another stock crash that we have seen in 2008 simply because through this next sovereign debt or budget deficit crisis, we might see the currencies go into very high or hyper inflation.

We might see the stock markets in the US actually surge in a type of Zimbabwe style hyperinflation scenario where the stock market likewise went through the roof. So it doesn't necessarily mean stocks are going to fall while we would advise to be cautious. But in China it's again different because a lot of companies are state-owned. So it's another hot factor to consider.

So if you are looking at the stock market there and how we would view this, obviously the prices aren't steep anymore as they were before during their crisis ie sell-off. We are lot more cautious than we were before when the market was on the floor. Having said that still we since like the Remininbi we do maintain positions in the Chinese market also not the exports sector but the local domestic economy also looking at convertible bonds as well as stocks just to cushion the downside risk in the short-term a bit.

Q: What is the view on India at Tyche? Do you still seeing valuation gains over here? What would you be looking at sectorally and where does India rank in terms of comparison with other emerging markets?

A: We don't like the exports sector because Europe and US - most of the exports are there that are going to those countries. We don't like the economies there and think that the crisis isn't over there. So just looking at the domestic plays and in the lot of the Indian economy - that's a good factor - is linked to the domestic economy. So that is a positive albeit we are even more cautious on the equity market in India now than we were on China.

One reason being also the budget deficit is being a big challenge on the Indian government and there is still infrastructure in the future going to be paid for. So that is a big difference between India and China. We are looking at more convertible bonds here than looking for direct equities.