2013 to bring fear of recession in US: Bruno Verstrate

In an interview to CNBC-TV18, Bruno Verstrate, CEO of Nautilus Invest expressed his view on the global markets. He believes the US debt situation is going to be the burning topic in 2013 and this would put pressure on US treasury and dollar.

"The markets didn't react too negative on the fiscal cliff deadlock, but everyone is underestimating it. All believe even if an agreement comes in place, it will have a negative effect on the economy," he added.

According to him, Q1 and Q2 are going to be the toughest and in the long run markets will find its upward path again.

Below is the edited transcript of his interview to CNBC-TV18.

Also read: Boehner urges Senate to act on 'fiscal cliff'

Q: What is the likely set of development up until December 31? Do the extra taxes come in to being or will they be averted?

A: Europe is clearly looking at US. This fiscal cliff discussion will have a hard or a soft landing effect. One should not underestimate the power of the US consumer on European companies. So, it is clear that all eyes are really looking at what is happening in US. What I believe is going to happen in 2013 is that the whole debt discussion that was clearly in the focus in Europe in 2012 and before, will defocus from Europe towards the west. The US debt situation is clearly going to be the talking topics in 2013. I believe that this would put pressure on US treasury and dollar as well.

Q: Are you expecting equity markets to correct or have the markets already factored in some bit of this uncertainty?

A: The markets didn’t react too negative on the fiscal cliff deadlock that we are in at this moment. Once the agreement is reached, everyone will calculate the negative impact to be on the economy. What everyone seems to underestimate is that even if an agreement comes in place, it will have a negative effect on the economy. We just don’t know how much, at this stage. So, once that is clear the market will react a little bit disappointed. They will fear that recession could come back in the US. That is going to be the big question mark in the beginning of 2013.

Q: So, if consensus clearly believes that something negative will happen, why is the market not correcting? Is the liquidity flow so strong that even despite news we will have just a one day correction and then move on, or do you see something sustainable if the cliff is overcome?

A: Once it is overcome, Q1 and Q2 are going to be the toughest. However, once that is cleared the market will be in a relief mode and will look at the economy again on how it is going forward in a natural way. Clearly austerity in the US is going to place a drag on the consumption next year. I believe that the markets will in the long term find its upward path again. In the short term I do see a good reason for disappointment.

There have been very thin markets and everyone seems to fear that they are not part of it and there is a bit of window dressing. In the end 2012 was a good year for equity and that is why most equity firms are not selling at this stage because of a bit of window dressing. So, that could explain a little bit why the markets are holding up. However, the closer we come to 2013, bigger the chance for serious correction on the equity markets based on the economy and on the drag that it will have from the fiscal cliff.

Q: Any thoughts on how commodities might pan out. These are contradictory forces isn't it?

A: Commodities are mainly driven by the emerging markets these days. The commodity space I believe that most of it will be focusing on how Asia is growing and there it looks pretty positive. So, on commodities I wouldn’t expect too much of a decline, although that decline has already taken place partially. So, there the commodity markets might be ahead of the equity markets at this stage. I do believe that commodity markets still have a good place in portfolios at this stage, given upward pressure on inflation from the emerging markets going forward.