Indian mkt to reach new highs in 2010: Roubini firm

Excerpts from Bazaar on CNBC-TV18 Watch the full show » RELATED NEWS Nifty to test 5500 post 5-7% correction: JM Financial Emerging mkts may head 20-30% higher in 2010: BlackRock Roubini warns of mega stock mkt crash 'at some point' ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Nifty BSE | NSE 30/05/12 Are Mutual Funds betting on Nifty?

Q: The question people are trying to battle with is how much weaker. Do you guys have a target on what the dollar might do over the next couple of months and how that tilts equations in regional currencies here?

A: We haven't started to make formal medium-term forecasts for the dollar or for specific asset prices. We do think - and we will do in the near future - as we build a strategy team at Roubini Global Economics, stay tuned for that, we'll be trying to make some forecasts and that will expose us much better to market conditions.

But I think it's fair to say that the scene is set for an extended period of dollar weakness, there will be occasional pullbacks, because of bouts of risk aversion, because the Treasury Secretary and others will start to talk about how a strong dollar is in national interest and other countries will worry about the weakness of the dollar, the Chinese with their large dollar reserves publicly are concerned about it. The Europeans, and to a lesser extent the Japanese, but particularly the Europeans are very concerned about it and the re-pegging of the Chinese currency to the dollar is aggravating the problem for dollar-euro and dollar-yen.

Whatever weakening needs to take place in the dollar to rebounce the US economy from so much consumption to more investment and exports - that weakening is being displaced from dollar-China, which is really the big price that needs to move to dollar-euro and dollar-yen.

Dollar-India, dollar-Brazil, dollar-Russia, dollar-Turkey, many other bilateral EM exchange rates are much freer to float than dollar-China. So they are in effect becoming a proxy for the lack of movement in dollar-China, with the dollar-euro being the fastest moving exchange rate relative to the fundamentals of the euro area in our opinion, and dollar-yen as well.

Q: What are you at Roubini Global Economics hearing about liquidity though? Is there a still lot waiting on the sidelines and is it looking to invest into markets like ours?

A: We think that there are still significant amounts of un-invested cash along the sidelines around the world. Fund flows into emerging markets and high yield in equity funds are recovering significantly and rapidly and that recovery is continuing several months of having started up.

Within the US, there's still USD 3.5 trillon in money market MFs, that's not a very high number so some has come out. But it is higher than normal and that is a source of the flow of funds into riskier asset classes. What we think will happen is that is there will be an upward bias into risky asset classes some of them may have gone quite far relative to others so US and global equities and G7 equities may have gone too far relative to their foreseeable growth prospects in the near-term to medium-term 2010-2011 timeframe. EMs have gone a long way as well. But given that the capital inflow episode that EMs are experiencing will boost growth in EM countries. We expect people to keep getting dragged into EMs maybe outperforming the developed world from here and maybe other parts of the developed world will outperform the equity market.

So credit in particular may outperform corporate and bank bonds. Corporate bonds may outperform equities in the near term. Commodities will do relatively well. There's been a big run-up in oil, in financial commodities like gold - that might continue for a while.

Q: Your boss, Nouriel Roubini, has not very convinced that this will be a V-shaped recovery but do you share his view that markets have run a bit ahead of themselves?

A: Nouriel has a very colourful and famous - if not infamous - view, which I share, which most of us at RGE share, which is that we are going to have a v-shaped recovery. We went straight down as the financial system imploded, starting with Lehman for about six months, turned a corner as the financial system stabilised during the six-month period.

Now, we are going through a bit of a bounce but these balance sheet constraints are going to come into play or are already coming into play. They will keep the labour market weak, they will keep housing stocks weak. They will keep residential and commercial real estate investment weak and they will keep consumption growth relatively weak.

We are going through a bit of a bounce now because the financial system has been rebooted. There is a bit of the inventory cycle, bit of release of pent-up demand because consumption had been under pressure - gradual pressure for couple of years and because there were six months of significant repression of consumption.

But over time, this kind of bounceback will give way to normalisation, so-called new normal as the people at Pimco call it, where we'll be in a more balance sheet constraint environment, growth will be slow. Eventually after a period of time, balance sheets will be repaired and we'll turn the other corner of the year. But that will take at least till 2011.