Liquidity to fuel market rally further: Arvind Sanger

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The current rally taking place in global markets is on back of liquidity 'which will continue to fuel markets further', Arvind Sanger, Managing Partner of Geosphere Capital, believes. In an exclusive interview to CNBC-TV18, Sanger said the liquidity would continue as there were no signs of any monetary policy tightening ahead. "The US is not in a position to tighten liquidity," he said, but added that India may need to tighten rates in 2010 and may be the first country to face inflation.

Here is a verbatim transcript of the exclusive interview with Arvind Sanger on CNBC-TV18. Also watch the accompanying video.

Q: What is your sense, are global markets going to go one notch higher even from here or are you in the camp which is predicting a retracement or a pullback?

A: It is very hard to call the next twist and turn in the road. I certainly don't feel like I have any edge on that one. But my view is that this is a global liquidity led rally and it has come a lot further, a lot faster than almost any observer would have imagined a few months ago. But as far as the liquidity - it is still very much alive. I don't think any of the major Central Banks whether it is the US Fed or even with all the news or noise that comes out of China, whether the Chinese regulators and the banking systems are really to clamp down on liquidity and as long as liquidity is there then any signs of negative news like for instance in India's case the monsoon or its effect, there are always good reasons why it won't matter so much and liquidity finds reasons for any near-term negative fundamentals to be overlooked. This is not to say that there are no positive fundamentals. But I think liquidity is the single biggest factor that is going to continue to fuel market direction. My sense is that barring any external shocks, markets should continue to trend high.

Q: But how is that different from bull markets in the past, you can't have bull market without liquidity, so why is it surprising this time around or are you saying that fundamentals don't warrant any optimism and therefore we have got a liquidity bubble on our hands?

A: As you know, commodities is the sector that we spend a lot of time looking at and we have never seen in any prior rebound of the bottom. The type of speculative buying of commodities being a much bigger factor and I mean this even compared to USD 140 per barrel oil last year. There is more speculative buying of physical commodities whether its oil or copper, which is being significantly driven by liquidity and the demand fundamentals have been much slower to come along. One could argue thill the market is just being very foresight and seeing the recovery around the corner and therefore the market is correctly discounting the improvement and that probably might turn out to be the case. But what we are finding is this time around the flood of liquidity has been unleashed by governments has created its own positive dynamics.

In China, when you had the liquidity release, the first thing that has happened is that Asia market went up, the next thing that happened was that the car sales and housing sales shot up and then you saw casino gambling revenues out of Macau start to recover. So, you had all kinds of fundamentals follow the liquidity. Therefore, liquidity is creating its own fundamentals. So, I think one can always argue about the cause and effect. This time its almost unquestionable that the liquidity is helping fuel at least some of the fundamental recovery that we have seen or atleast the stabilization that we have seen. So, in that sense its uniquely powerful, but it's a factor.

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