Global market rally: How long will it continue?

Global stock markets scaled new heights on back of central bank stimulus and corporate earnings reports. But the big question is whether this rally is sustainable.

Hans Goetti, Finaport too wonders whether the fundamentals justify this rally. He clearly attributes the current stock market rally seen across global markets, to money printing or the massive quantitative easing by central banks all over. "It is pretty clear that all central banks of the world want to direct capital into risky assets to create wealth effect and equity market is the most important one from that perspective," he added. The Dow topped the 15,000 mark and the S&P 500 also was also at record highs. Even the London's FTSE 100 and Germany's DAX saw an uptick. On the home front, Nifty is already above 6000 and Sensex is on the threshold of the psychological 20,000-mark. There is a good chance for the Indian market to move higher because there is still a case for the central bank to lower interest rates and inflation could ease. All this could benefit the Indian equity prices, said Goetti in an interview to CNBC-TV18. Moreover, he is overweight on US and Japan again on back of continuing stimulus by their respective central banks. Also Goeti said the fundamentals for gold have not changed.“We still see massive currency debasement induced by central banks and that in the long run will be bullish for gold.” Below is the verbatim transcript of his interview on CNBC-TV18 Q: It has been a strong run in terms of the US markets as well as the European markets. How much more of an upside would you see and does the fundamental situation in the European markets actually justify the run that we have seen in the equities? A: We have been wondering for quite some time to what extent the fundamentals justify the stock market rally. We have come to the conclusion that the major driver for the rally in the equity markets whether it is in the US or Europe or Japan have been the central banks. We have Quantitative Easing (QE) on a massive scale in all these countries and fundamentals do not look that great to us but central banks are a big driver. Q: So how do you play the markets in that case? If you are advising investors what are you saying are the top performing classes? Would you continue to have them put more money in developed market equities? Where would emerging market (EM) equities figure? A: For now we are overweight on the US and Japan. Europe, we are not that convinced but in the US ,you have massive stimulus by the Fed. In Japan you have even more so, if you look at it in proportion to the economy. So these are out two markets which we are overweight and what we are seeing now especially in the US is groups that have lacked so far like the cyclicals or small caps, starting to move higher. They have actually broken to new highs, which indicate higher prices over the next few weeks at least. Q: How would you read the fall or the changes that we are seeing in the commodity prices as opposed to the moves in the equity space for example Brent crude is pretty much hovering between that USD 100-105 per barrel range? We have gold also which is pretty much range bound despite the fall that it has seen on a year to date basis. What would you assume are driving these two prices in particular and how do you expect them to move? A: We have to make a distinction between commodities on one side which is crude oil and all the industrial commodities, and gold which is not a commodity but which is a currency really. As far as commodities go, you see lower oil prices and pressure on industrial metals as a result of relatively weak global economic activity. Infact global economy has been slowing over the past few weeks and that is reflected in lower commodity prices. As far as gold is concerned we think gold prices have been hammered and it will take time for it to rebuild from a technical perspective before it can move higher. We think the fundamentals for gold have not changed. We still see massive currency debasement induced by central banks and that in the long run will be bullish for gold. Q: Where do you stand on emerging markets (EMs) especially on India? Do you think that with the performance of the last few weeks the rise may continue on a follow-through? What are the yearly gains, if any, are expected from India? A: There is a good chance that the Indian market will move higher from here, for the same reasons as all the other markets’ rise. India has the added advantage that we are still in a position where the central banks can lower interest rates; we are in a down cycle when it comes to interest rates. We also see an easing of inflation if commodity prices keep getting lower, so we see some relief on that side. Therefore the Reserve Bank of India (RBI) has some leeway, which means again equity prices should benefit. Q: What kind of valuations are US markets and Japanese markets quoting at? For US markets in particular we are back to the 2007 highs but valuation wise is it looking less challenged than it looked in the past? Can the rally be justified therefore in terms of valuations even now? As well as a certain feeling that a euro exit or a euro breakup now appears to be much less of a danger. Would those two factors justify the rally in the US? A: The rally in the US is mainly based on central bank liquidity provision to the markets. If you look at earnings for instance, we have had flat earnings growth over 2012; yet the equity market was up 13 percent, which means we had a P/E multiple expansion, and that is a function of interest rates and monetary policy. We see that continuing. Corporate earnings growth is relatively subdued and corporate guidance is pretty soft. So, we think the major part of the equity rally will be an expansion in the price earnings ratio not in earnings. Q: Some part of the rally perhaps in equities has been money abandoning commodities. Is that trade still got to go a distance - short commodities, long some developed market equities or has that played out? A: It probably hasn’t played out completely but it is pretty clear that all central banks of the world want to direct capital into risky assets to create wealth effect and of course the equity market is the most important one from that perspective. They are trying to do anything and everything to get equity prices up and may be gold prices down. Commodities again reflect the relatively weak economic environment. However, we are getting to levels in commodities also where you can start buying again at some point. Q: In your opinion how long do you expect the liquidity drive to continue, the impetus that we are getting from global central banks? Do you see the strength to continue the entire calendar year? A: If this was a cyclical problem in the economy, I would say probably it will end sometime this year but this is not the case. What we have here is a balance sheet recession, we have a lot of debt in the system and people are talking about rising interest rates. For example US has almost USD 17 trillion in national debt and if interest rates were to go up by 1 percent that means the debt burden or the debt servicing would be increasing by USD 170 billion per year. So we have to look at it in that sense. We do not see any serious attempts to lower this deficit and under the circumstances, and given the still weak growth we think that this money printing exercise will continue for quite some time. Probably well into next year and may be even beyond.