Big worry not Greece but Portugal, Spain: F&C Investments

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

The back and forth on Greece's fiscal debt reached a deadlock after Greece's prime minister failed to convince leaders of three parties to agree to reforms which are necessary in order to secure a bailout.

Jeff Chowdhry, head of emerging equities, F&C Investments tells CNBC-TV18, the Greek situation at this moment is like a see-saw that could swing either way. He says that there is an economic financial brinkmanship which is going on at the moment with nobody wanting to back down.

With the European Central Bank (ECB) focusing on its three-year long term refinancing operation (LTRO) for banks, for it, the bigger fish than Greece is Portugal and Spain.

Below is an edited transcript. Watch the accompanying video for more.

Q: Do you think eventually Greece will have to agree or given the kind of labour problems that are there, there is a possibility that the deal may fall through?

A: There is always a possibility. What we have got is an economic financial brinkmanship which is going on at the moment and nobody wants to back down. It's by no means a forgone conclusion that they will accept the terms. At this point of time I would say it's 50-50.

Q: Do you think the entire decision can get rolled over because the leader of the second biggest party who is likely to win the next election is still saying - no to the whole deal? Is there a chance that the political stalemate continues for longer than what the markets are now bracing themselves for?

A: The markets at the backend of last week were assuming that it was a forgone conclusion that the deal would happen. In my opinion, it's not a forgone conclusion. You have to remember, this is not just about economics. It's about politics, power and ultimately who is going to run the country. So, don't assume that is going to happen.

Q: Even if the PSI deal goes through, there is a lot of confusion as to whether the ECB will be willing to take a cut down on what it holds. The ECB has been very active in doing the LTRO's and trying to improve the liquidity situation, but when it comes to Greece, it's been reluctant. What's you are thinking of what the ECB has on its mind right now?

A: The ECB has a much bigger fish to try and get after. Although they would like to have a Greek deal, the bigger issue is not Greece, it's actually Spain and Portugal and you are right, LTRO is just QE, its monetary liquidity. That's going to be their focus of attention and they will continue to pump a lot of money into the market.

Q: Let me ask you likely scenarios - what's your best case? What's your worst case? What's the likely case?

A: The likely case is probably I would say 55-60% chance that the deal will be agreed, some compromise will be reached, but there is obviously a chance that it won't happen. What could then happen is that the focus of attention will then turn to the next stage of the LTRO. Obviously the markets are expecting a much bigger package of monetary easing. That's sort of the best case but having said that, things can go wrong. The markets have been very strong so far this year and there is not much room for a negative surprise.

Q: There has been plenty of talk about this risk-on trade in global risk assets through the first month of the year. Do you think the second LTRO on what liquidity it might bring can give a fillip to what's on currently or do you think a lot of it has been factored in and the money that comes later on will be used primarily to refinance the Italian and Spanish debt?

A: The latter, a lot of the risk-on trade. I came on your programme in December and I was listening to a couple of your commentators, just before I came on and they were falling over themselves to be bearish. I came on and said - look sentiment is too negative and we are likely to get a rally. We have had that rally now and we are going to pause for a breath now.

Q: Are you smelling that it is too positive now?

A: Yes. We have gone through a similar situation where in December, people were telling me that the Sensex was going to lose another 500 points and look at the rally that we have seen in the market, look at the rally that we have seen in the banks. We are due for a consolidation period now.

Q: Would you get out of banking stocks? Is there a profit taking call that you are giving or is it that you just stay put, you are not seeing a too much of a downside? What would your actual investment action be and what would you watch out for?

A: If you look at the banking sector, every Tom, Dick and Harry bank has gone up in a straight line since December. My focus very much from here sticks very much to quality. Companies like HDFC Bank , Bank of Baroda - these are the types of companies that one should be focusing on now. If you have had companies, which were up 30-40% since the low, with dubious potential quality then I would be definitely getting out of those names now.

Q: Any outstanding names in the midcap space that passed your radar?

A: The largecap space for us continues to look attractive. If you have good largecap companies selling on attractive valuations, my simple answer is why bother.