Expect no major positive cues from EU summit: Jerome Booth

Starting Thursday, European leaders get together to discuss different ways the region’s debt crisis can be tackled. Jerome Booth of Ashmore Investment, however, doesn’t expect to see significant positive announcements from the summit.

In an exclusive interview to CNBC-TV18, Booth says that hopes of sustainable measures from the European Union summit are fading. “I am afraid it’s probably going to be more of the same pattern of policy makers being behind the curve, rather than in front,” he said. Speaking about the Indian market, Booth says the market needs policy action from the government to start performing. “The market is hoping for better policy action post the change in the Finance Minister’s post,” he added. On the whole, he sees emerging equities post strong performance in the second half of the year. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: The market seems to have been a bit disappointed after what it heard from the FOMC. Are you expecting any kind of stimulus from that side at all given the worsening of the recent US economic data? A: Well I think it does depend on the data. What we have seen obviously is three negative payrolls in a row in the United States and batch of other very bad data. I think the market expects, and I expect, the Fed to do whatever is necessary and that has led to a reduction in perceived tail risk, but also pretty low growth. I think the real concern in the US is the so called fiscal cliff. The effect of the ending of fiscal and tax measures, which would be equivalent to 4% of GDP, which comes off at end of year. So ahead of that we might well expect more Fed action, including more quantitative easing. Q: The more immediate cue is the EU summit. How important do you think that is going to be and how much is riding on it? A: We are all concerned, but it will be too little. Clearly there is something going on with banking and fiscal measures to try and consolidate particularly the banking sector. We will have potentially some structural reform and growth agendas coming through as well. But I am afraid it’s probably going to be more of the same pattern of policy makers being behind the curve rather than in front. The latest bailout of Spanish banks really didn’t inspire confidence because it wasn’t through equity, it was through bond markets and these bonds very possibly senior to other creditors, which gives even less incentive for private bond holders to voluntarily buy sovereign bonds. We are not really focusing enough on regaining credibility of private markets. Q: What do you expect to see from a market perspective – do you think the best of the summer rally is behind us? A: I think equity markets, particularly in the US, are being driven by QE, by the sense of the tail risk being reduced. We have started to see a rally in developed world equities, or HIDIC as I call them, heavily indebted developed countries. But emerging equities will catch up and I think we are going to see pretty strong performance in EM equities in the second half. Q: Are you still holding your hopes up for some coordinated global liquidity stimulus in the next couple of months? A: I think central banks are clearly following each other to some extent in the developed world. Emerging countries, including India, have very different cycles so there is no reason why they should follow what’s going on in developed countries. India has very different problems and lesser problems than US or Europe, so the stimulus that we care about is mainly the US and European monetary stimulus. That will be more forthcoming because of fiscal cliff in the United States and if we see further deterioration in conditions in Europe. Q: So aside from pure equity underperformance, would you be concerned about the macros for India as a market? A: I think it’s been overdone in India to be honest. There is a cyclicality here. As I mentioned earlier, I think the RBI was right to not cut interest rates. We need to see action from the government, and I think the government has woken up a bit to this. The problem is we have only got another couple of years before another election, there is speculation about the finance ministry post changing and what that will bring, but it does appear there are signs that the government is now thinking about doing something about the confidence in terms of structural reforms etc. I think the evidence there has to come in first, and only then will we see a change in confidence and we should see growth resume. So it’s a complicated answer to a simple question. I think we are going to see optimism return and with that we'll be able to see investment, which will in turn spur growth. Q: How worried are you about those recession fears people are talking about and what kind of impact might will it have on market levels, for the S&P for instance? A: I think the likelihood in the near term is that the equity market in the US continues to go up. I do think equity markets in emerging markets will do better. This is about the expectation of further QE in the context of fiscal cliff in US and having the Fed ready to defend against tail risks. So the opposite scenario where the equity markets falls is really a pretty unpleasant scenario of a much worse falling confidence globally, which the QE policy doesn’t cope with. For that you need to see several Lehman type collapses somewhere in US or Europe. You need to see much greater sense of financial chaos and then yes, the equity market might crack. But I think it is rather binary; either it drifts up a little bit from here or we see a much worse scenario. Eventually people will adjust again and the equity markets will go sideways because we do have volatility in expectations at the moment. People are not yet working out that the US at best will probably grow 2% for a few years more. They get every excited from time to time that is going much faster and then they get disappointed again.