Mkt focus to shift towards fisc cliff by yr-end: Macquarie

Foreign inflows to emerging markets like India have been quite encouraging in the recent past and Richard Gibbs, Global Head of Macquarie Securities feels as the end of the year is approaching, the markets will be more focused on the US fiscal cliff. Eventually, investors will be looking to position themselves for the beginning of 2013 and they are likely to look for economies with good domestic demand, potential for domestic growth in various sectors, opined Gibbs.

Meanwhile, looking at the market dynamics investors are willing to go long on emerging economies, added Gibbs. Here is the edited transcript of the interview on CNBC-TV18. Q: How is it looking like for the tail end of this year? Is there more to the kind of rally we have seen in many emerging markets?
A: I think there possibly is more to that as we go towards the turn of the year. Clearly, the focus in relation to the advance markets is on the fiscal cliff in the United States and that is making the risk off trades, the flavour of the day again in those markets. But, we are seeing capital on the move.
We are seeing investors now looking to try and position themselves for the beginning of 2013 and that really looks as if it is going to be focused on economies where there is good domestic demand, domestic growth potential in relation to the sectors. Q: Is that accounting for the kind of sharp inflows that we have seen in India over the last 10 days or so or is there something country specific like what is happening in the parliament and the political arena which has got investors excited?
A: I think there is some country specific issue and you can always say that will be the case for India because at the end of the day, India is an extensively domestic demand driven market. That is to say that the trade exposure in terms of outbound trade is reasonably slight, particularly when you compare it with China and greater Asia.
 
Therefore, policy shifts, policy changes is likely or perceived to impact favourably on the further expansion of the demand base for the Indian economy and it is likely to be taken favourably by investors. I think that is operating behind the scenes to add some voracity to those capital flows that we are seeing. Q: Is there a possibility that we do not get resolution on the fiscal cliff issue by December end and the markets get rattled or do you think with so much advance notice something will be cobbled up and investors need not worry about the year ending on a sour note?
A: I have just returned from the United States and that was certainly the view I was putting. But one can never rule anything out with politicians as we know from Indian experience. There is certainly a risk that we are seeing in the next couple of weeks. There is a rise in the perceived risk in relation to the fiscal cliff even though the actual risk may not be realized.
Certainly for a lot of investors the real cliff comes in mid-February and that is when we hit the national debt ceiling in the United States. Do not forget that was what caused the problems last time, particularly with the tea party members of Congress when some of them believed that they were quite happy to take the US financial system or government into default on that debt side and that debt ceiling.
We may stumble through December 31 and the cliff event, but as I said the other one really does beckon in terms of the February rise or hitting of the debt ceiling there for the Federal government.
_PAGEBREAK_ Q: How do you think 2013 is setup as a year for equities? Is it going to be a high volatility kind of year especially, around all this news flow or do you think post any resolution in February it is going to be a fairly steady trend?
A: No, I have a feeling that 2013 is going to be much like 2012 and that is for fundamentally biased investors. It is going to be extremely difficult to get your investment bearings using fundamental and quantitative analysis. That is because of macro economic dynamics and more importantly because macro policy dynamics are going to continue to play a big role.
We are in the hands of policymakers on the one hand, but also politicians on the other hand in relation to outcomes that can detrimentally or positively affect market sentiment and drive capital flows. That is making it extremely difficult for those fund managers and hedge funds, alpha generative models, quantitative valuation models to get a good handle on investment value. I think that is going to be really what marks out 2013 once again. We are going to be left to the vagaries of politicians, policymakers and macro economic developments. Q: The observation right now seems to be that markets like India are pulling a lot of hot money, ETF kind of money. Are you hearing about any long only interest picking up in a market like us going into next year?
A: Yes, there is certainly long only interest picking up and that is picking up on the basis that of the performance of emerging markets over the last 12 months that we are just completing. They have been pretty stagnant in relation to market generating growth or performance growth.
As a consequence to that the market that you have seen run the hardest and delivered the highest returns has been the United States of course. We can argue that in the next couple of weeks that a lot of those gains maybe actually given back to the market with the doubts about the resolution of the fiscal cliff. But because we have seen such underperformance in the emerging markets over the course of 2012, we are now seeing value investors and as you said long only investors are really searching out those opportunities.
They have been pretty much spending the most of this year doing their homework, doing their numbers, running the rule over the sectors and now they are really getting ready to strategically deploy that capital and many of them have already begun that process. Q: In the Asian region which countries do you see best positioned to suck in the global capital in 2013?
A: There is an interesting dynamic going on in the Asian region as we speak and we have talked a lot of this in the United States over the last couple of weeks. That is where we are actually seeing fixed capital investment coming out of China, particularly in terms of production facilities and it is seeking out particularly the South Asian economies that have cost and labour advantages.
We are seeing money going into the Philippines for example. Philippines’ economy is doing very well and its inbound investment flows have picked up markedly. Indonesia is also coming through very soundly as is Thailand and also Vietnam is getting an increased focus now. We are starting to see those economies in Association of Southeast Asian Nations (ASEAN) and also India in the subcontinent being looked at as potential production bases as we start to see Japanese firms particularly looking to pull production capacity out of China.
There are a lot of reasons for that. One is of course the cost of production rising but, we cannot discount the significance of the geopolitical tensions between China and Japan now in influencing these investment flows.