Bullish on risk assets, France can outperform: Julius Baer

Markets had a bit of a sluggish day globally because of the Fed meeting yesterday that highlighted quantitative easing and more liquidity injection should not be taken for granted as it has been taken by the global markets over the last couple of years. Mark Matthews, head of Asia Research, Julius Baer told CNBC-TV18 that the environment remains bullish for risk assets.

“Liquidity conditions will be supportive if the US economy gets so much better that the unemployment rate goes to 6.5 percent and markets would go up on the back of that story,” Matthews adds. He also said that France is likely to outperform in 2013.

Below is an edited transcript of Mark Matthews's interview on CNBC-TV18

Q: What did you take away from the minutes of Fed meeting? Should one get worried about liquidity tightening in 2013 or it’s premature to draw such a conclusion?
A: I think it is premature. A few of the Federal Open Market Committee (FOMC) members said they want to end the purchases in 2013. But a few could mean three, which is not a lot. If it was a majority, they would have said as a majority and so I do not mind if a few of the FOMC members want to stop the purchases in 2013. But that will be very data dependent, specifically on the labour data and the labour data in the US is improving at a very slow rate and is still very weak.
If one go back to the FOMC minutes of December ’12, where they spelled out the new evince rule whereby they would continue a very low interest rates and QE until the unemployment rate gets to 6.5 percent or below, then we will still get QE3 until the unemployment gets at 6.5 percent. Also Read: Can PE funds in India deliver returns for their investors? Q: Is there any reason to believe that liquidity conditions will not be supportive to asset prices in 2013?
A: The only way it would happen is if the US economy gets so much better that the unemployment rate goes to 6.5 percent and markets would go up on the back of that story.

Q: Is this the kind of a situation where either way you slice it stock prices are going higher?
A: It sounds naïve but the general conditions now are good in the US. The fiscal cliff is behind us which was holding back the market otherwise it would have gone up on the QE3 news and the evince rule which was announced on December 12th.
China, the data is getting better and there seems to be a smoother political situation there now. In Japan we have seen a tremendous recovery and the Nikkei on the back of new Abe administration doing everything they promised. Being much more stimulatory for the economy and the only elephant in the room is Europe, but I do not think it is such a big elephant after all.
The only thing going wrong in Europe right now is Cyprus, which is a tiny country and I cannot believe it’s enough to bring us all down. Spanish bond yields at 5 percent and the opposition candidate in Germany seem to be putting his foot in mouth. It means Merkel is going to win the election in September which the markets will like. So it all looks good to me.
_PAGEBREAK_ Q: Do you expect any volatility between today and the first of March as issues like the debt ceiling and spending cuts gets debated? Or do you think that may not inject any uncertainty into the market?
A: I am sure it will inject uncertainty and there will be many headlines about the debt ceiling just like there were about the fiscal cliff. But they have resolved it. what we can extract from the fiscal cliff is that the While House and the Congress are capable of bipartisanship, they did get the deal through and not all Republicans are crazy and many of them are pragmatic, in fact what they stood for was perfectly sensible in the sense that big problem with the US is that the government spends more than it takes in and that is still an outstanding issue which will come back to haunt us at some stage but not right now. Q: What are your expectations for 2013, a big year along the lines of 2012 or more tempered gains?
A: It could be like 2012 in terms of the upside in equities and of course 2012 was - nothing happened if you look at it until the ECB announced its intention to intervene in markets in the summer but the first half of the year was pretty dead.
We can have a good year like 2012 because if you look at the Fed, the ECB, what the Bank of Japan (BoJ) is going to look like come April and the major central banks are in a dovish frame of mind and yet we are seeing – if you look at the Korean Purchasing Managers’ Index (PMI), the Singapore industrial production earlier this week, Chinese PMI, some signs of an economic recovery globally, it’s conducive environment for equity prices. Q: What are your big bets for this year in terms of Asian country preferences?
A: I haven’t got any strong ones now. Markets are going up but I do not know which ones will go up more. I am sure some will. The stories that I felt more comfortable with last year were in South East Asia, little markets like Thailand and Philippines and I still think they have good stories. But since they already did well last year, I highly doubt they will go up another 30 percent.
I will put one idea which is France, down about 40 percent from its peak before the global financial crises. I am talking about the CAC quarante and yet if you look at the composition of the CAC quarante index, there are mostly well run multinational companies, very diversified like Total for example.
If you look at the German DAX index is now back up to its previous high. So the values in France and that’s the reason because the French have had no reform. But there are some tentative signs now that even in the birth place of the revolution, the French themselves realised we cannot go on like this. So my contrarian bet for this year would be France.