Bullish on riskier assets over 6-12 mths: Deutsche Bk AM

Excerpts from Bazaar on CNBC-TV18 Watch the full show » Nifty BSE | NSE 25/05/12 Are Mutual Funds betting on Nifty?

Marshall Gittler, Chief Asian Strategist of Deutsche Bank Private Wealth Management believes the bond markets to be skeptical and the credit market shows that more trouble is likely.

He said that he wouldn't be buying into the rally as he expects further deleveraging. He is bullish on riskier assets over a 6-12 month horizon.
Though, he thinks emerging markets are less risky than developed markets, especially Asia.

The Fed move is a good one and may be ready to cut Fed funds rate, he said. According to him, India's low exposure to subprime and reasonable valuations is a positive for the markets, while, India's current a/c deficit is a negative, dependent of portfolio investment.

Excerpts from CNBC-TV18's exclusive interview with Marshall Gittler:

Q: Is the worst over for global markets or is it just a temporary relief?

A: I do not think so although the equity markets are saying that good times are here again but if you look at the bond markets there are lot more skeptical. We haven't seen the same sort of euphoric reaction in the bond markets that we are seeing in equities. On the contrary; credit spreads aren't narrowing, the treasury bill yields are still lower. The credit markets are telling us that there is more trouble to come.  

Q: Would you sell this rally then? The rally you are seeing across emerging markets this morning?

A: I certainly wouldn't be buying into it although on a 6-12 months view I am still bullish on risk assets. I think one will be able to pick them at cheaper prices in the next month or two. I think there is still more deleveraging to come. 

Q: Is that how its still being perceived that the emerging market basket is the riskier space? 
 
A: People are cutting back their risk all over and are selling whatever they have a profit on and the profits on emerging markets were good so far this year. People perceive correctly or incorrectly that emerging markets are riskier than the developed markets and hence there has been selling in the region.

But if one looks at what the causes of the problem are then I think emerging markets are at a less risky right now than the developed markets and especially Asia is a net creditor not a debtor. In a credit crunch you want to buy creditors not debtors.

Q: What do you think is the prime concern on most markets mind at this point that there is still a lack of clarity on how big this problem is or that we might be heading into an economic slow down in the US? 

A: This is very interesting because the size of the problem is well known and everyone agrees that this subprime mortgage crisis is about US 100-150 billion, which in the scale of things isn't very much.

Previously everyone thought credit derivatives would help things because it defuses the risk so nobody is particular exposed but what we found is by defusing the risk nobody knows where the risk is and that's caused lenders to just hold off from lending everybody.

This really isn't a subprime mortgage market crisis anymore it's a credit market crisis, a problem of trust. You just can't trust any borrowers and so banks have been cutting off credit across the board and till people find out where these bad assets are being held the lenders will be extremely reluctant to rent anyone no matter how strong the fundamentals are.   

Q: How did you read the Fed action on Friday and do you think that September we headed for a Fed funds rate cut and what could that mean for emerging market equities?

A: I think it is good; I think they are riding to the rescue. They have learnt their lesson in 1987. If one remembers in October 87 when stock market crashed the Fed merely came in and said we are here, we stand ready to supply liquidity to the market, which they did, and in fact the markets recovered their stability pretty quickly. And growth in 1988 was stronger than 1987 so having learnt that lesson they have come to the rescue again.

I think they will be prepared to cut rates actually. Fed fund cuts if the situation deteriorates. They are going to stand by the market and that should relieve some of the anxiety in the markets because after all this is not a problem of the losses its the problem of trust and one can solve that by just supplying liquidity and getting the markets over this hump.       

Q: In a scenario like that any specific call that you take on India as market now or would this also be underweight category?

A: India is both in a good position and a bad position. To take the bad position first, India is quiet unique within Asia as the only country with a current account deficit. It is therefore much more reliant on risk capitals than other countries. About 80% of the capital inflows into India have been portfolio investment, non-direct investment. Whereas the average emerging markets is about 25%. So if there is general restriction in the supply of risk capital to emerging markets India is going to hit worst than most other markets. That's the real danger for India.

On the other hand if we get over this and the supply of risk capital improves well India is not very exposed to the subprime mortgage crisis. The fundamentals are still very good and our view from our chief investment officer in India,  is that valuations in India are quiet reasonable so we would think that it would be actually better placed than some of the other markets which recently have been hitting record highs to continue to a rally. So it's just depends on how long this period of uncertainty continues.         

Q: What's your guess you said you would find better prices in the next few weeks. Do you expect another 5-7% to go in most Asian markets from here?

A: I do not want to put a number on it but I think the problem is that at end of august lot of investors are going to get their statements from hedge funds or from mutual funds, they are going to see that are down and they are going to ask for their money back, they are going to pullout. This is likely to cause another round deleveraging in September so we could see another leg down.

There is also no guarantee that all these surprises are out of the woods. There could be more down grades, so I think we have got at least another month or two before it will pass over the worst in these problems. Everyone will also want to see what the Fed does in September.  

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