Fundamentals of European countries improving: StanChart

In an interview to CNBC-TV18, Sarah Hewin of Standard Chartered spoke about her reading of the European market condition and the road ahead. She says investors are seeking yield.

"They are happy to take on peripheral debt, which previously they would have shunned, and all of this is supporting flows into Europe." she says.
Furthemore, she says, the dire risks that the market was concerned about this time last year have receded for the moment. Below is the verbatim transcript of Hewin's interview to CNBC-TV18. Q: Yesterday, despite some disturbing GDP numbers for the eurozone, we did not see the market crack. Will we begin to see that having an impact at all or is liquidity ruling the roost?
A: Liquidity is playing a huge role here and the yield seeking the sense of renewed risk appetite means that investors are really prepared to look beyond the underlying economics. They anticipate that there is going to be ongoing liquidity from the developed market central banks for sometime yet and that ought to be positive for flows into the markets. Q: How are people over there reading the weakness that we have seen in euro? It has gone to levels of 1.286 now.
A: The view here is there is a sort of disconnect between what is happening to the underlying economy where we had those very weak first quarter numbers and the sentiment as regards market. When we are looking ahead key is going to be what survey data are saying about the outlook for the second quarter. Also Read: Eurozone economy shrinks in Q1, marks longest recession
To a certain extent the data that we had yesterday were backward looking. Surveys coming out next week with Purchasing Managers' Index (PMI) and the International Standards Organisation (ISO) surveys are going to give us a better idea about whether recession will linger on into the second quarter of the year. Other factors are clearly playing an important role as well.
The investors are seeking yield. They are happy to take on peripheral debt which previously they would have shunned and all of this is supporting flows into Europe. Q: An important upgrade has come for Greek bonds and as a result that extraordinary performance of the Athens Stock Exchange (ATHEX) and Greek bonds yields fell even below 9 percent. Does that remove a major tail risk? Two years ago this time we were dominated by conversation about the Portugal, Italy, Ireland, Greece and Spain (PIIGS) countries. Now if people are buying those bonds has that positive been adequately factored in or could that unleash a wave of buying?
A: There are fundamental improvements in Europe. That is clear. This is something that we have been arguing for sometime that even though the economic situation is pretty poor countries are managing to reduce deficits. They are implementing structured reforms. They are experiencing stronger export growth as a result of improved competitiveness.
The Greek story is part of this dynamic really. There is still some way to go. We may yet see a restructuring of officially held Greek debt. I think that the dire risks that the market was concerned about this time last year have receded for the moment. We need to bear in mind that there are ongoing political fragilities across the euro area. Those could move back into the headlines, but for now governments do seem to be broadly doing the right thing. Q: What is StanChart calling by way of growth that we could see in the front-line European indices by year end? What would the target be?
A: We are looking for a contraction in GDP this year of 0.5 percent. So, we are still at the more pessimistic end of the spectrum. Within that we see the first half of the year struggling but recovery emerging in the second half of the year. So I guess this is a similar profile to the one that the European Central Bank (ECB) has been looking for.
That also means that rates stay low in our view for a very long time. We have a year end euro target at 1.29, so it is not too different from what we see currently. The US economy we think will be picking up speed in the second half of the year.
However, but if we are right about the euro area also doing well then those factors also mean that we do not see too much of a different level for euro by year end than we do now with both central banks continuing to hold policies very accommodative. Q: We have seen a seminal fall in commodities. It has largely been a short commodities-long equities trade that we have seen over the last 8 months or so. Is the commodity fall over because you are speaking about a positive growth and growth picking up speed in the second half or is there more to go in terms of commodity falls?
A: We think that on the energy side commodity prices can stabilise and slightly strengthen in the second half of the year. We do think that we will see something of a pick up in momentum across developed markets. In China in the second half of the year and also core supply constraints are likely to be an ongoing concern for the market. So, overall for energy, we certainly see prices stabilising and edging higher in the third quarter.