Need more resolve from central banks to move markets: CCAM

In an interview to CNBC-TV18, Mark Konyn, CEO, CCAM gives us his expert view on how global markets are panning out now after the big events - the EU summit and the ECB and BoE monetary policy played out.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: We have already seen the central bank action. What are you looking at for markets hereon? Do you think risk assets are going to take a backseat since the central bank action was not spectacular?

A: Markets were somewhat disappointed with the news out of Europe that they didn’t really cease the opportunity to push forward since the last summit and start to act pan-European in terms of treating the banking sector as one and China get the repurchasing going for on bonds again. So we saw the interest rate cut, but that was pretty much priced in. So markets disappointed they didn’t do much more.

There are still expectations that there is more stimulus and stimulus measures down the track, but the three measures that we saw ECB, Bank of England and in China, the borrowing costs came down potentially in terms of easing the credit squeeze in China which was probably the only piece of good news out of that three-way newsflow. Markets are somewhat disappointed and I think we are going to need to see some more resolve from central banks to really move sentiment.

Q: Will this disappointment result in a sell-off in the equity markets or some weakness? What’s the kind of equity movement that you are seeing?

A: The mood is already pretty downbeat given the problems that we are seeing coming out of Europe. Most importantly, the weaker economic numbers that we have seen come out of the US since the end of the first quarter, in my mind that’s more significant than the ongoing issue in Europe with the debt crisis. As such, risk assets have been out of favour.

We have started to see on expectation of a stimulus, we started to see some speculation that some of the developed economy currencies would start to underperform relative to emerging market currencies and the rupee had started to improve about a week ago. But clearly this disappointment has put that on the backburner.

I don’t think there is much more downside in the equity markets. There is still some volatility of course, but the opportunity really is for risk assets to move up if policy starts to support financial assets.

Q: While the other risk assets have reacted with disappointment crude over the past two weeks has been an outperformer. We saw the sharp jump coming into crude from USD 90-100 or 11-12% gain. What explains that? If the growth numbers are as bad as they are, should this head back or will it continue to remain there for other reasons?

A: It’s slightly incongruous as you are suggesting that we are seeing disappointing economic numbers coming out of three key regions and yet we are starting to see crude prices creep up. This is not really a demand driven initiative or a movement in price; this really is a supply side issue and its concern over tensions particularly in the Middle East across the Straits of Hormuz and the ongoing tension between Iran and other countries.

It’s more about supply side issues than it is saying anything about demand, because we know the demand side is pretty weak. I don’t think that’s going to alter. If we drill down a little bit into each of the key regions, growth in the US clearly is not convincing. We have got more job data forthcoming, but I don’t think that’s really going to change the overall picture significantly. It’s going to take time for markets to get more reassurance that US growth is intact.

In Europe, the peripheral countries now are really looking like they are becoming quite depressed. We are sort of moving beyond recession in many of those economies and in the core economies in Europe it’s pretty much a flat-lining situation which could get worse because the opportunity to use inflation as a tool to help the euro zone overcome some of its issues that opportunity window is starting to close, because if the economy starts to flat-line and the peripheral countries start to get depressed, any amount of inflation is not going to reverse that trend in the short-term. The outlook on the demand side is pretty weak. We can explain that crude price movement really from a supply side consideration.

Q: There is a lot of cash which is sitting on the sidelines. What do you expect that cash to do now? Is it likely to go into equity markets or is it likely to chase some currencies. Show do you expect this smart money to move now?

A: Certain equity markets are quite depressed and as we know certain currencies have been sold down quite significantly. I’ll refer back to that period of speculation ahead of the ECB meeting and there is clearly a suggestion that investors are willing to come back in and take the opportunity to build up positions in markets or currencies that have been oversold short-term and to try and get some value in the portfolios.

However, the confidence that sits around that is pretty fragile and as we have seen, a small disappointment on a rate cut decision in an ECB meeting has almost reversed that instantaneously. So the situation remains fragile. The bias is still towards the risk assets because we still believe there is more stimulus coming. However, underlying economic strength is really not there.

What's perhaps more worrying if we look at through portfolios and the investment outlook particularly on the equities side, what's more worrying is that corporate companies now are becoming quite cautious as they plan forward their reinvestment plans, capital expenditure.

This is because there is not a lot of visibility once again because the wild swings we are seeing as a result of changing sentiment on the back of policy initiatives from the central banks and governments is making it quite a difficult business environment to plan and that will really exacerbate any chance of recovery in many of the economies.

Q: Would you be long India at this stage? Indian equity markets are at a higher plane after the fall in crude prices. Is that play over?

A: No, I don’t think that play is over but it’s quite interesting. On the assumption that the current account deficit can be narrowed and there is every sign that could be the case, we have got in real terms we have got a weaker rupee which is better for trade of course and on the assumption that you have got a better external environment and oil prices are reasonably stable, I think you are going to see the Indian economy start to improve gradually and on the back of that you will see a reallocation to India.

As you will probably detect, it’s the first time, probably for a year, I have become a little bit more positive. However, the risks associated with that are clearly higher crude prices and a weaker external environment. The more important of those two really is the weaker external environment and as long as these uncertainties continue around Europe and certainly in terms of growth in US it is going to be a difficult process in terms of predicting when India will recover. But these are good entry points.