QE3 might be necessary; US economy slowing down: Finaport

Expectations are high, ahead of the Bank of England (BoE) and the European Central Bank (ECB) monetary policy decisions. Thursday's announcements from the ECB and BOE, and bond auctions in Spain are expected to take center stage before Friday's US non-farm payrolls data.

In an interview to CNBC-TV18, Hans Goetti, chief investment officer of Finaport says the US payroll numbers are politically sensitive. If the employment report is weak, it may trigger the US Federal Reserve to come out with another quantitative easing program. The US economic data has deteriorated in the last few months. Below is an edited transcript of his interview. Watch the accompanying video for more. Q: What are you going with into this meeting of the BoE and ECB?
A: They have little choice. They have to do something in terms of liquidity injection. The BoE will expand its QE program, that’s pretty clear and the ECB will cut rates. The consensus is calling for a 25 bps cut. We would not be surprised to see 50 bps, because after the EU Summit, some progress was made at least in the view of some and the ECB has a tendency to follow-up on these things rather aggressively. So there is an outside chance for a 50 bps cut there. Q: Assuming if you do get what consensus is going with, the 25 bps cut by the ECB and something from the BoE with respect to an asset repurchase program, what happens to the equity markets? Will the rally continues or you expect that it’s already factored in and hence the rally fizzles from here?
A: This is already factored in. This has been very well telegraphed. It seems that these rallies that are based on QE and more liquidity for central banks seem to be getting shorter and shorter. It looks to us as if the current relief rally is running out of steam already and the fundamentals are actually deteriorating. We are not holding our breath. The market will may find it pretty difficult to move on the upside from here. Q: What are you expecting from the US Fed? Is there a quantitative easing chance over there as well or will you hold your judgement till you see the payroll numbers?
A: The payroll numbers are very important. That’s the numbers they are certainly worth watching plus other data that is coming out. What you can see in the US is that economic data has deteriorated over the last few months. The Fed is watching this. If the payroll number surprises on the downside there is a possibility that the Fed might actually act sooner rather than later. At the end of the day, they will probably have to come up with more QE because the US economy is slowing down pretty rapidly now. Q: For a QE3, do you think a lot depends on this employment number which will come out on Friday or is it more or less certain that we are going to get a QE3 from the Fed?
A: In the medium-term, it’s pretty certain we get QE3 whether it’s sooner or later, probably depends a bit on the payroll number this Friday. The consensus is calling for 90,000. If it’s much less than that that, it might prompt the Fed into action a little bit early because the unemployment number is a politically sensitive number also with a view to the November election. Q: In anticipation of QE which you somewhat consider inevitable, should you move into risk assets, stay right there or should the call be that economic downturn is so severe that QE cannot really make too much of a difference to risk assets and you move out?
A: The range of possible outcomes is so wide at the moment that you cannot bet one way or the other. These fat-tail risks are tremendous at this point. I have never seen anything like that in the few decades that I have been in the industry. The best way to position yourself would be to be diversified; you have to be positioned for the risk-off trade. If you have an exposure to some corporate bonds, probably some high yield bonds as well, because income is still a very viable investment theme.
On the other hand, if you have equity exposure what you want to be in are high quality companies with high earnings visibility, in noncyclical sectors and those which have prospect of a dividend increase. That’s probably where you can position yourself plus you want to have positioning in gold because central bank interventions will continue which eventually leads to currency debasement and gold is the best insurance policy against that. Q: Over the last few weeks when we saw commodity prices getting badgered we did seem to see a trade away from commodity countries like Indonesia getting marked down and India getting marked up. What's your sense with respect to emerging market equities? Is that trade over or is there still some pro India headroom left?
A: Industrial commodities will probably remain under pressure because the global economy is clearly slowing. India might actually benefit to a certain extent because it keeps downward pressure on oil prices as well. That’s a positive for India. If you look at the Indian market action over the last few weeks it has actually been quite resilient. It was relatively weak in June but has recovered again in July.
So that’s an indication that commodity prices are on the way down rather than up. So in that case, we would bet probably more on the side of a global slowdown and lower commodity prices.