Mkts to remain weak as investors focus on macro risks: RCM

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Dr Mark Konyn Chief Executive Officer at RCM (Allianz Global Investors) believes that the markets are factoring in China's earlier-than-expected exit from stimulus measures. However, he adds, some concerns on macro data in the US and Europe still remain. "The markets are likely to remain weaker despite reasonable earnings as investors are focussing on policy and macro uncertainty."

Positive on the India growth story in the long-term, Konyn says, India is in a good place to take advantage of the recovery. "India's economy and its asset markets are vulnerable to both a further tightening in domestic policy settings and to any disruption in the supply of international capital (which India now needs in order to finance its current account deficit)."

Here is a verbatim transcript of the exclusive interview with Dr Mark Konyn on CNBC-TV18. Also watch the accompanying video.

Q: Can you give us an explanation of what has driven the kind of outflows we have seen, we keep hearing about ETF-led pressure but is that it?

A: I think firstly we saw, as we came into the year, the Chinese authorities acts perhaps sooner than was expected in terms of starting to tighten monetary policy and just as China was first into the whole programme of economic stimulus and Central Bank policy to stimulate domestic economies around the world at the start of the financial crisis, it started to raise the risk of whether or not China being first to hedge for the exits, would be the first of many to start tightening and to exit from those economic policies.

So markets started to sell-off on the back of that and the main index up in Shanghai is probably off around about 8%, I would say now and certainly our prediction has been that it could continue to sell-off a little bit longer. I think on the back of that, you then had concerns over some macro debt related to the US and more recently the issue in Europe with the failure of the balancing the budget in Greece and the spill-over effect that it could have across the euro zone is now causing most investors to derisk portfolios and if that means pulling back on exchange traded funds (ETFs) then that is probably consistent with the overall mood at the moment where investors are concerned about policy risk, they are concerned about macro issues and in some ways they are putting aside what they are seeing at the corporate level where earnings have been by and large pretty promising across the region and perhaps globally but they are more focused now on macro risks.

Q: How big is this European risk in your eyes, do you think it could glow up like a Lehman kind of an episode or it does not have that big a downside risk potential for global markets, it is overstated in that case?

A: I think fundamentally it is undermining the credibility of the ECB at the moment and the euro. Greece's economy is not sufficiently large to threaten the whole euro zone economic progress but clearly now analogies have been drawn with on a smaller scale Greece perhaps a larger scale Spain and other economies within the euro zone and we haven't really seen yet the European Central Bank or the ministers come out with a clear indication of how they are planning to manage this.

In fact this is a little bit confusing and it is starting to bifurcate - the investors are starting to worry whether this is a fixed exchange rate mechanism or what it is held up to be a truly single currency zone and I think as long as that uncertainty is out there, you are going to see these flights of quality and you are going to see a reversal of a lot of those risk trades. So you are seeing obviously dollar strengths as the euro weakens, you have seen a pullback from certain commodity markets, we have seen the price of gold slip and we are seeing investors start to think that maybe this is the onslaught of faltering overall in the global economy.

So in terms of sentiment, investors are quick to join the dots and draw conclusions and pullback remembering that emerging markets had a pretty good run, some of that money has been taken off the table and it was hoped that coming in 2010 the risk appetite would continue to be reasonably strong and what this has done is caused concern and investors have derisked to a large extent.