Follow-up on EU summit promises key for markets: F&C Invest

In an interview to CNBC-TV18, Jeff Chowdhry, head of emerging equities, F&C Investments says the European Central Bank’s meeting on July 5 is less crucial perhaps than some people believe simply because policymakers have already put in place a sort of roadmap towards banking supervision at the EU summit last week.

“So, it’s less important than it was, but clearly there is always a chance of a big banana skin when policymakers in Europe are involved,” he adds, stressing the pressing concern for markets is to see some follow-through of the promises made at the summit in order to get the euro zone back on its feet.

Below is an edited transcript of his interview to CNBC-TV18. Watch the accompanying video for more.

Q: The frenzy has extended into today as well and we have got some amount of positive news, its not incrementally negative news in terms of the manufacturing data as well. Do you see a more durable base put in place for global equities and a sustainable rally on the upside or is this just a sentiment move that we are seeing?

A: It’s more of the latter to be honest. Obviously, we had a very big rally on Friday. A little bit more subdued today. One of the things which clearly has happened is that bond yields around Europe, particularly, in terms of the smaller countries have come down a lot that has helped sentiment. What the policymakers did last week once again, is they pulled away from the horrible brink as it were. We need to see some specific measures as a follow-up to this. We are definitely not out of the woods at this point in time.

Q: We did get the economic data and the PMI data from the euro zone. We had the unemployment data which is at the highest level we understand since 1995. Does the EU summit solve any of these fundamental issues going forward? Can we see an improvement in the next couple of months, or maybe in unemployment data or maybe even something like PMI? How fundamentally changing was the EU summit?

A: The simple answer is it doesn’t change things at all on a near-term basis. The PMI data which has come out, it shows that Europe is actually sliding deeper into recession. That is good, in the sense that it basically means that policymakers can’t sit on their backside, they have actually got to do something because essentially Europe is now in a deep recession.

Q: What would the approach be towards emerging markets like India because the one thing that we had going for us was the slippage in crude. Now that seems to have moved back up as well. How do you see the second half pan out?

A: I don’t worry too much about the oil price. Although the oil price rallied very sharply on Friday, it was deeply oversold. Fundamentally, oil should really trade around current levels on a supply and demand basis. I am not too worried from that perspective. As I mentioned on your program last week, India is very oversold and the oil prices have obviously come down quite a lot. In that environment, India can do well in the next six months.

What we do need to see from the European side clearly is the follow-up to the rhetoric on Friday through some measures to not only tackle the fiscal deficit, but which also looks at the growth issue as well. This is what the key will be for the markets for the next few weeks.

Q: How crucial is the ECB meet which happens on July 5?

A: I think it’s less crucial perhaps than some people believe simply because the policymakers had already put in place a sort of roadmap towards banking union or banking supervision. So, it’s less important than it was, but clearly there is always a chance of a big banana skin when policymakers in Europe are involved.