Equities may retreat substantially in January: Jim Walker

Jim Walker, MD of Asianomics believes global investors will continue to remain focused on Asia, helped by the fact that credit conditions in China have eased considerably. However, he feels, this easing actually does not solve any problems for China. In fact, he says it increases the unbalanced nature of the growth in the country.

"I think people are going to be revising down their China forecast pretty dramatically come the end of Q1 next year," he told CNBC-TV18 in an interview.
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But things will be even worse for the Eurozone where Walker is expecting to see a recession next year again. "We are expecting around 1-1.5 percent of a contraction in European GDP next year," he says adding a good idea will be to short Germany and France in terms of equities.
"The US will not be growing fast and China is likely to go into the reverse over the course of the first six months of next year. So assuming the equity markets are forward looking, January can easily be a month in which equity markets are in retreat fairly substantially," he told the channel. Below is the edited transcript of Walker's interview. Q: What have you made of this recent optimism in global markets about fiscal deal going through and triggering off more risk-on in the near-term?
A: Yes, that has come in as a surprise to me. The markets are so fixated on the fiscal problems in America. However, ofcourse it is December-end and December traditionally is a very strong month for markets. People are trying to window-dress their books. They are ramping up the prices where they can, so I do not suppose it is as much of a surprise that we are seeing a positive December. Q: How likely does it seem though, that there will be a resolution in place by the end of this year? Would the best of that be in the price for markets already?
A: It is a hard one to call, because there are reasons for the Republicans and Congress not to go with the deal and then just let the fiscal cliff happen, at which point they will be able to negotiate tax reductions. Whereas, at the moment, if they go with the deal, they largely have to negotiate tax increases which seems kind of strange to me. However, there is a lot of good news in the price. Whereas, the reality is that the US economy is going nowhere very fast. The personal income data in particular, is negative year-on-year (YoY). People are looking for 2.5 percent gross domestic product (GDP) growth in the US next year. Even assuming a fiscal deal, I think we will be lucky to get one. Q: There has been a huge resurgence in the number of people turning bullish on China or talking about it in a bullish fashion. Going into next year, would you say maybe the focus is going to shift to this part of the world rather than the US?
A: I think the focus is still pretty much over Asia and people have got a lot more bullish about China. There is no doubt that the government here has started spending a bit more money on fiscal infrastructure and the credit conditions have somewhat eased over the last two-three months. What is happening is that, all of the money is just going straight back into property and that is going into road building. That is going into the things that local governments do, which as we all know, are pretty much future bad debts for the banking system.
So, the optimism is about the activity and is about the fact that the government has eased up. The problem is, the way that they have eased, it actually solves nothing for China. It increases the unbalanced nature of the growth in the country. When we look at the companies, which I think are much more important for foreign investors, who are finding that as cash flows are not there to back up their profit numbers that means account receivables have gone through the roof, inventories are up and basically cash is not circulating in the system.
I think people are going to be revising down their China forecast pretty dramatically, come the end of Q1 next year. They will probably keep things going till the end of Q1, because that is when the National People’s Congress (NPC) meets and then the new government is firmly in the place. However, after China falls off a cliff, there will be definite attention on the slowdown of China. Q: If what you are saying is correct, that this is just year-end euphoria led by technicals and shallow markets, what in your eyes is the case for a January correction?
A: I think the case is very strong for January correction. If people start concentrating on corporate earnings and particularly in terms of valuations in many stock markets, most specifically in Europe, Europe will be in recession next year again. We are expecting around 1-1.5 percent of a contraction in European GDP next year for all sorts of reasons, and the banking system will have to shrink its loan books even more. So, the European equity markets are way ahead of themselves. We would be recommending people to short Germany and short France in terms of equities.
The US will not be growing fast and China is likely to go into the reverse over the course of the first six months of next year. So assuming the equity markets are forward looking, January can easily be a month in which equity markets are on retreat fairly substantially.

Q: Part of the peg on which people expect markets to rally next year, is the expectation that Central Banks around the world will go with enormous easing in terms of their policy. Given the point you are making about liquidity as also from markets like Japan, do you think it is going to be that easy a decision?
A: I think a lot of the Central Banks have already maxed out their quantitative easing programmes. The point is that the private sector has to be on board with these programmes for them to really work. All that we have done so far, with all of this quantitative easing, has caused misery for millions of people around the globe in terms of higher food prices and higher energy prices. Commodity prices have been probably affected more than anything else by the amount of money that has been printed over the last five years.
There are 48 million Americans on food stamps, compared to 2009 when President Obama took office there were 32 million. So saying that things are going better in the US economy, knowing that 16 million more Americans are on food stamps than there were four years ago, would be incorrect.
I think there is are huge number of problems still to be sorted in the global economy but the Central Banks have done nothing to help the real economy so far. All they have done has caused inflation in commodity prices and inflation in asset prices. That is now feeding back into the real economies. I think that is going to come home to rest at some point and 2013 seems a good year for it to happen if we are right and economic growth slows down next year rather than picking up.