Except US, rest of the markets okay with Obama win: HSBC

Arjuna Mahendran of HSBC Private Bank says markets, particularly the ones outside of Asia, are quite comfortable with Obama second term at the White House. "The S&P 500 and the Dow Jones will probably trade in a very tight range and the bias would be more to the downside than to the upside in my view until this is resolved,” he said.

"The QE is already upon us. It came in September; it was QE3 but actually it was QE infinity because it was open-ended. The Fed basically could keep buying tens of billions of dollars worth of government treasuries indefinitely because they didn’t set a cap on how much they could buy." Below is the edited script of his interview with CNBC-TV18’s Ekta Batra and Sonia Shenoy. Q: The reaction to the US election results has been a positive knee-jerk reaction for market such as India but if you had to just summaries in a two-three quick pointers on what the short-term impact and the medium-term impact will be post this event?
A: In the short-term it is business as usual. The markets, particularly outside America are quite comfortable with Obama Presidency, perhaps more so than the Americans themselves, judging by the polls etc. Nevertheless there is a looming problem of the fiscal cliff, which we have discussed over the last six months but the markets haven’t taken that too seriously. But now that you have configuration of a Democrat President facing a Lower House of Congress dominated by Republicans, we are in a status-quo mode and our minds have to go back to August 2011, when the US government borrowing limit hit a ceiling and the US government was potentially running short of funds. That is going to be the issue for the next two-three months. Q: Extending that point forward, according to you then how exactly do you think the US markets could possibly trade till the fiscal cliff situation pans out that is basically early 2013? And what would the repercussions possibly for emerging markets?
A: If you go back to last August, September, it was a pretty nasty period of risk aversion that we faced globally, including in India. I suspect given the rather fractious relations between the Democrats and the Republicans, this could potentially lead to the tea party getting even more steam under its wings and becoming even more intransigent in terms of opposing the Presidents proposals to raise taxes for the richest Americans, which really is the nub of the issue.
Until that hurdle has been surmounted, I think you could have a extended period of stalemate, which goes all the way back to President Clinton’s term when he was also battling the Republicans and you had a partial shut down of US government for a few months. Let us hope it doesn’t reach that stage but that is a possibility and I think the markets will reflect that.
So, basically the S&P 500 and the Dow Jones will probably trade in a very tight range and the bias would be more to the downside than to the upside in my view until this is resolved. Q: In terms of asset classes what would be your preferred list of asset classes from now up until the end of the year?
A: I will continue to be defensive. We have invested in growth in the middle of this year but now we have taken some of the profit off the table. I am turning quite defensive; go in for bonds, high grade bonds in particular globally. Although on high yield bonds there are some opportunities, I would go more for high dividend yield stocks, which are also defensive, in all markets including India just to earn that yield. Because to me, the way I see it is that equity markets will be in tight ranges globally, for the next three to six months and the best way therefore to grow your money is just to go for yield. Q: Coming to the liquidity scenario, according to you what is the possibility of a QE4 coming through for the market at this point in time and what is the requirement of it at this point?
A: The QE is already upon us. It came in September; it was QE3 but actually it was QE infinity because it was open-ended. The Fed basically could keep buying tens of billions of dollars worth of government treasuries indefinitely because they didn’t set a cap on how much they could buy. Therefore this is going to run for a while. We have already seen the impact of this in terms of money flooding into equity and bond markets into Asia, in particular. We have seen all the markets running fairly well in South East Asia and India with the exception perhaps of China but that again has also risen in recent weeks.
So this flood of money coming in from the West into our markets will continue. Whether that money will raise the market indices rather than specific sectors within markets is the debate that’s going on. I suspect its going to be a game of rotation next year. Trying to anticipate which sectors are going to be the winners in this new environment where a) we are seeing decoupling of the emerging markets from the western markets because inflation perhaps is not as much of a threat now as it was a year ago and b) we are also going to see that there is a big push to stimulate domestic consumption to ward off the slowing export story. That is going to lead to all sorts of sectoral plays within our markets and that’s going to be the way to make the money next year.