Need to work on Spanish, Italian debt markets: StanChart

In an interview to CNBC-TV18, Manpreet Gill of Standard Chartered Bank says global markets are in a lull as they await Federal Reserve chairman Ben Bernanke’s congressional testimony.

The market is especially keen for another round of quantitative easing. On Tuesday, Bernanke didn't offer immediate promises of more action, but later discussed the steps the Fed might take ahead.
According to Gill, more progress needs to be made is in terms of long-term fiscal integration, in terms of tilting the bias towards growth and more on the short-term dealing with pressures in peripheral sovereign debt markets. In his view, there are more pressing concerns which is the Spanish and Italian debt markets that also need to be dealt with more decisively. Below is an edited transcript of his interview. Q: This seems to be very quiet for global markets. How do you read the next move for them?
A: The global markets were quiet because no one wants to take significant positions ahead of Bernanke’s testimony and we haven’t got a lot out of that. In our view, we are very firmly in a muddle through environment and if anything, Bernanke’s testimony reinforced that muddle through environment.
A muddle through is an environment where we expect yielding assets to do well; whether that is equities or high yielding corporate credit and that is really the asset classes we continue to like in this kind of environment. Q: What would you make of Angela Merkel’s statement about more needs to be done and we will succeed? Should that be something the market should watch out for?
A: Absolutely. What is happening to Europe is driven to a large extent by policy and political events. But in Europe, on the policy environment where the progress has been made is on banks and that is a big positive. But where more progress needs to be made is in terms of long-term fiscal integration, in terms of tilting the bias towards growth and more on the short-term dealing with pressures in peripheral sovereign debt markets.
So Merkel’s statement definitely makes sense from a long-term perspective and that sets the direction where the zone as a whole needs to go. But in our view there are more pressing situations which is Spanish and Italian debt markets that also need to be dealt with more decisively. Q: What about crude oil, has it gone out of whack with fundamentals? It’s a fairly steady gain that we have seen in the last 3 weeks or so recovering nearly 50% of what it had lots?
A: In our view this makes sense. One of the factors that we cited was the fact that geopolitical risk payments seem to have completely been taken out of the price which clearly wasn’t justified. What you are seeing now is two factors at play.
One is the reintroduction of some geopolitical risk payment which we think is justified and the second is you are seeing an end to the previous period of oversupply where you had production from OPEC running almost at absolutely full capacity, you had US inventories rising at an unusually high rate. We think we are over that period so the oil pricing is now reverting back to where we think they should be. Q: What are investors doing with the cash on books? Which equity markets are they approaching? Are they planning to deploy money in anticipation that we will get monetary stimulus whether through US or China?
A: Markets appear to be a little undecided. Clearly there are some expectations of monetary easing from all regions in fact but markets seem to be very undecided about how high the probability of that occurring is. In our view China is one area where you are already beginning to see some of that and the signals from policymakers seem to be very clear that we should expect more.
In our view markets have not priced that in adequately. That’s why we see Chinese assets as an opportunity. Where we think there more monetary easing is very likely is ultimately in Europe. And policymakers have been reluctant to do it. They may end up being pushed into it by peripherals, debt markets but we think there is a higher probability of that happening and we would slowly and gradually begin positioning for that. Q: How are you placed on the various Asian markets, in particular, India? There appeared to be a flow of funds in favour of India probably because of lower commodity prices as well as some improving macros like a slightly lower tick on inflation and a definite improvement in the trade deficit. Is everything juiced out in terms of good news?
A: In our view the risk reward is gradually improving on Indian equities from a global investor’s perspective. In our view there are two big factors - there are domestic risks which to a large extent have been in the price for some time. It is likely that you have less bad news whether it is trade deficit or any policy measures. Those are likely to be positive and the drop in inflation was a positive.
But where we still remain a little concerned is that ultimately the rupee remains one of the highest beta currencies in the region and we do see a resurgent risk in Europe. The rupee does have a potential to spike lower even if that has nothing to do with Indian fundamentals. That is the reason our view on the market is still unchanged. We are still neutral.