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Jun 27, 2012, 04.12 PM IST | Source: CNBC-TV18

StanChart expects little from EU; overweight on China

With the European Union Summit scheduled to begin from tomorrow, global markets are looking at cues to improve market sentiment. Although, the expectations from the summit is quite low, in the absence of strong measures from the summit markets are likely to be concerned, opined Manpreet Gill of Standard Chartered Bank.

With the European Union Summit scheduled to begin from tomorrow, global markets are looking at cues to improve market sentiment. Although, the expectations from the summit is quite low, in the absence of strong measures from the summit, markets are likely to be concerned, opined Manpreet Gill, Senior Investment Strategist of Standard Chartered Bank.

In an interview with CNBC-TV18, Gill further added that they are currently underweight on Europe but, remain overweight on Chinese and Korean markets. The global risk sentiment, according to him, is now being driven by Europe and global markets are ignoring the developments taking place in places like China. Gill is quite hopeful about China and believes that it could surprise the markets in a positive way.

Citing concerns over the weak rupee, Gill said that the Indian currency is now being driven by global risk appetite.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.

Q: Going into the EU Summit the expectations are already extremely low and this is going to be the 19th EU Summit that we are seeing. If once again the EU Summit disappoints, do you think the markets are going to give up any hope of a concrete policy action from the policymakers and hence the equity markets will remain subdued? Summits can come and go, but we are not going to get anything by way of an action.

A: That's right. I am not sure markets would give up completely, but they would be very, very concerned if we don't get some clear measures to resolve some of the big outstanding issues at this summit. The fact is that peripheral government sovereign debt markets are already showing signs of stress. That's the first place where we will see worsening of the situation, if we don’t see some strong measures from the summit.

I think market expectations are low. But, there is still room for further disappointment from this point onwards. Markets are clearly sending a signal that they are concerned. They are looking for some strong measures from policymakers and if they are not forthcoming, it is possible that we may see a period of volatility starting within European peripheral debt markets and maybe extending further within the region.

But, we do believe an end event like that maybe required to push policymakers in Europe to take the stronger measures that haven't been forthcoming in a big way so far.

Q: Are there chances that there could be a strong bout of risk aversion after the summit? Clearly, these are difficult to solve questions. You don't see Germany agreeing to the joint bond in one summit. Is there a chance that we are going to see some deep cuts?

A: It really depends on the asset class. Like you said earlier, there is a lot of bad news already in the price. Expectations are very, very low. But clearly if we see a disappointment, the room for weaknesses is likely to be concentrated on peripheral Europe debt markets, European equities where we are underweight and possibly some other sort of high-beta risky assets.

But if you look at asset classes like global corporate credit, which have remained remarkably well supported throughout periods of risk aversion, we think those will be less adversely affected. That's why we believe those are sort of better places to ride out the risk of any sort of bout of risk aversion.

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