Euro to stay in recession till 2014; upbeat on US mkt: Citi

European markets have been through a rough patch of late and Geoffrey Dennis, MD of Citi believes it is likely to stay in recession till 2014 with negative growth. He also expects more monetary stimulus from the European Central Bank (ECB) including further interest rate cuts.

However, he remains overweight on the US market. According to him, it has done well when compared to the emerging markets due to the fiscal cliff deal and the US economy is also in reasonably good shape at the moment. But, Dennis is disappointed with the performance of emerging markets this year.
"Our US strategist is expecting a level of 1,615 at the end of the year on the S&P. That is about 8 to 9 percent away from where we are at the current levels. We think the reason why the US market has done well this year compared to emerging markets, compared to India and nearly every other emerging market is because the fiscal deal was concluded around the end of the year. In our view, it has avoided or taken away the very big risk to the US economy falling off the fiscal cliff," he explained.
Dennis further said that the weak Yen is actually helping the Japanese market and as far as India is concerned, they currently remain underweight because the valuations are relatively higher compared to the other emerging markets. Currently, India faces a difficult mix of growth and inflation and therefore, Citi has cut India's FY13 GDP forecast to 5.7 percent against 6.2 percent predicted earlier.
"We think that India continues to face a difficult mix between growths and inflation and the growth numbers continue to be poor and of course we just saw the most recent gross domestic product (GDP) numbers, which were again disappointing," he noted.
Besides, Dennis is hopeful of seeing the Sensex reach 20,800 by the year-end. For now, he would like to bet on the Indian banking sector instead of focusing on defensives. Going into the Budget, though he does not find it to be a game changer, he thinks spending cuts are necessary to maintain India's fiscal deficit targets. Moreover, the finance minister's thrust on structural reforms are going to be crucial, he opined. 
Here is the edited transcript of the interview on CNBC-TV18. Q: Shivers across global markets post Federal Open Market Committee (FOMC) meet day before on withdrawal of stimulus, what is your sense, will that quantitative easing actually taper off by 2013 end?
A: I think that the stimulus from the Federal Reserve is going to continue to a very significant extent. In our view, interest rates are going to stay low for a couple of years, probably until 2015. I think it’s too premature to assume that quantitative easing (QE) will be reduced in size.
We think that the minutes which upset the market so much about 24 to 36 hours ago had more to do with the Federal Reserve. Some members of the committee are a little nervous about what the implications of the Fed’s security buying may be. It is still underway and I do not think there is any real sense for what the Fed is saying that they feel it’s not yet time to withdraw the stimulus. So we feel there are concerns about withdrawing the stimulus or reducing it will probably fade again and the market should recover. Q: How long will the global liquidity remain comfortable, that is will it remain supplied from both the US as well as Europe?
A: Certainly, we would expect to see it continue through the rest of this year and indeed next year. We need to divide up as far as the Fed is concerned between low interest rate, which as I said is going to be in place until 2015 and quantitative easing at the current levels, which may not last even through the end of this year.
So, the extremely low interest rates are going to be here for the long-term to come. Quantitative easing may be get reduced eventually because the members of the committee are nervous about what the long-term implications of all this QE will be.
With respect to Europe, it is in a recession. It is going to stay in recession according to our economists till 2014 with negative growth and we are looking for stimulus from the European Central Bank (ECB) including another interest rate cut sometime in the first half of 2013.
_PAGEBREAK_ Q: You indicated that you expect global markets to stabilise and reduce concerns over premature ending of QE3. Already the Dow and the S&P 500 are virtually close to new highs. If things stabilise and perhaps improve with additional liquidity coming in from the European market, where do you see the US market headed now?
A: We like the US. We are overweight on the US market in our global portfolio and our US strategist is expecting a level of 1,615 at the end of the year on the S&P. That is about 8 to 9 percent away from where we are at the current levels. We think the reason why the US market has done well this year compared to emerging markets, compared to India and nearly every other emerging market is because the fiscal deal was concluded around the end of the year.
In our view, it has avoided or taken away the very big risk to the US economy falling off the fiscal cliff. You had dramatic fiscal tightening and the economy went back into recession. We think that risk has been removed now and more fiscal challenges are to come. Our view is that the US economy is in reasonable shape now and the US market should do relatively well this year. Q: Are you equally bullish on the emerging markets as well as you are on US and where does India fit after last year’s outperformance?
A: We are disappointed for sure with the performance of emerging markets so far this year. They have of course underperformed considerably. I think there are a number of reasons for that. It is partly because every part of the developed world had reasons to be optimistic this year in terms of markets. For example, the weakening yen has helped the Japanese market but, also emerging markets have been held back by weakness in certain important markets. Taiwan has been fairly soft, South Africa has been fairly soft and Brazil has also been soft.
Taking the year as a whole, emerging markets will do bad as well as global markets overall. We are looking for gain of around 10 percent on the year. That means we would expect to see emerging markets begin to catch-up the developed markets as we go through the year because the developed markets are outperforming at the moment. Q: You have scaled India to underweight again. What are your key concerns with respect to the Indian economy or Indian markets?
A: We are underweight on India once again. We are not neutral, we are underweight on India. There is nothing particularly wrong as far as we are concerned with respect to India. We put this position in place at the beginning of the year. We didn’t feel at that time it had the preconditions to be an extremely strong market within the emerging market universe.
Our concerns in India remains very similar to what they have been over the last several months. Valuations are relatively high, certainly compared to emerging markets as a whole although, not necessarily particularly high compared to India’s own history. We think that India continues to face a difficult mix between growths and inflation and the growth numbers continue to be poor and of course we just saw the most recent gross domestic product (GDP) numbers, which were again disappointing.
On the back of that we have reduced our Indian growth forecast for fiscal 2014 from 6.2 to 5.7 percent. At the same time, inflation is still persistent and therefore it is a difficult policy environment although, we do expect the interest rates to come down.
India would be vulnerable if there were to be a significant period of risk-off in market because of the sizable current account deficit flows that could come out of the market. Although, I am very well aware that the foreign institutional investors (FIIs) flow is going to be extremely strong and of course supported the market recently, always saying that money could equally and quickly come out in the event of less favourable conditions. So, putting everything together, we think India does fine this year. We just do not think it will be an outperformer. Q: Why don't you paint that scenario for us? Do you think the risk-off trade combined with Foreign Institutional Investors (FII) pulling out could be a huge spot of bother to you with respect to your Indian positions?
A: Of course you have to worry about this all the time. When we are talking only about a 10 percent move for the year, that is not a great deal for a calendar year and there will be periods during that calendar year therefore, where you will see some selling pressure. I think timing any selloff is a difficult thing.
For example, the subject of conversation is the fact that we have had a significant selloff in the last day and a half and I do not think it is necessarily going to last very long. But, we are not particularly nervous about India because we think that the selloff is coming. We are just saying that fundamentally there maybe better opportunities in the emerging markets.
Having said all of that, the Indian markets are back down at around 19300-19400. Our target for the end of the year from our Indian strategy team is 20800 and that is still an 8 percent upside. So I think you will make money in India in equities this year.
_PAGEBREAK_ Q: What are you expectations from the Budget this year? Can it be a game changer?
A: We would be surprised if it is a game changer. The fiscal side is also challenging for the government, because the overall Budget deficit is very high. We expect the Finance Minister to reiterate the Budget deficit targets as they are now 5.3 percent for the central Budget deficit for fiscal 2013 and 4.8 percent for 2014.
We think they are going to have to do some spending cuts and also some revenue increases to hit those targets. But, we are not looking quite honestly for radical changes. The game changer in India in the last few months of course has been the announcements on structural reforms.
Some proposals in the Budget on structural reforms, which is really a clear roadmap towards Goods and Services Tax (GST) or significant additional disinvestments from the public sector, would be the things that would change the game with respect to India as opposed to the continuation of a challenging Budget situation which we expect the government to respond to and maintain their existing target. Q: How would you be tactically positioned on India with respect to individual sectors? Which ones are likely to outperform and which ones can underperform?
A: Despite the underweight position in India, within emerging markets as a whole we would tend to favour something of an aggressive position with respect to India. A little bit of a bias towards cyclicals, a little bit of a bias towards high-beta markets.
Our favourite sector without any question is the banking sector in India. That gives you a high base effect. We are looking for earnings growth of low double digit growth rates at the moment, for both this year and the next year. So we think that there is some upside and we tend to favour some of those growth sectors that will eventually respond to a stronger economy and would be less inclined to focus on the defensive sectors.