Investors on the lookout for action from ECB, EU: IG Market

Justin Harper, head of research of IG Markets tells CNBC-TV18 that the sharp corrections witnessed in global markets has investors entering the field again to pick up some solid companies which are available at a discounted price.

Hopes of Greece reluctantly staying within the euro zone have lent a hand to investor sentiment as well. Harper says the European Central Bank (ECB) and the European Union (EU) now need to step into the banking space in Spain, Portugal and even the UK to stabilise the their floundering economy. Below is an edited transcript of his interview with CNBC-TV18. Watch the accompanying video for more. Q: What would you attribute the strength that we are seeing in the global equities space to today?
A: We have seen some sharp corrections across global markets and you are going to get bargain hunting at any level where the markets have fallen so much that people are coming back into the market to pick up some good solid companies that have been sold off indiscriminately. We are seeing that.
We are seeing a little bit of hopes of Greece staying within the euro which I think has lifted some spirits. We are also seeing China maybe pushing the monetary easing button as well. So there are a few bright spots on the horizon but generally the feeling is still very much downbeat on the euro zone picture. Q: Do you think the market has largely factored in a possible negative outcome on Greece? Do you think the bad news from Europe could be behind us at least for the near-term?
A: I wish that was the case but sadly I don’t think so. I think a lot of the downside risk has been priced into the market but there are so many unknowns. We don’t know the repercussions such as Greece leaving the euro zone is the first big uncertainty and after that there is the knock-on effect of Spain, Portugal, Italy and possibly even Ireland.
So there is that worry and that hasn’t been priced into the market because no one knows exactly what that would lead to. There is still a lot more downside which is why we are seeing the euro hit two-year lows and why we are seeing so much negativity across the globe. Q: What's happening in the Spanish banking space because Bankia was at a record low yesterday? Is there more concern now arising with regards to what the status of other Spanish banks could be and how that could percolate across the EU especially in the banking space?
A: Yes I think so. The banks in Europe are the cornerstone of the economies and they underpin so much when it comes to confidence in actually making sure the economies’ wheels are well oiled and when we see banks like Bankia which is the second biggest bank in Spain need to be capitalized by the government, there are worries for weaker banks in Spain.
Then you have to look at Portugal and Greek banks and across the euro zone. Even in the UK we are seeing weakness there so that’s a real worry. But with the financial sector, the market will need to do more and the ECB and EU will need to step in more and to help strengthen the balance sheets of these banks because they account so much for the confidence within the euro zone. When we saw the Spanish banks being downgraded, we saw a big slide in sentiment and across equities and that could happen further if another Spanish bank needs to be propped up by the state. Q: Do you see the ECB coming out in a large way if there were to be a negative event in Greece? What would be the implication of such an easing move by the ECB? Do you think risk assets could rally after a potential negative impact of Greece?
A: I think they could, everybody is hoping. They are waiting in the wings whether it is the ECB, the EU or the IMF. If things really take a turn for the worst and people are monitoring things, we are sort of at that crisis level with Greece if they ever did decide to leave the Euro and then the Europeans have to go back to the drawing board, you would hope that the ECB and the IMF would step in and help stabilise the euro zone.
At the moment they are not needed but they are waiting in the wings and we need to see more about what they are prepared to do. We are seeing that with the Spanish banks which is now the cause for the EU to directly get involved with the banks rather than give the money to the Spanish government. There is definitely a role for them to play, it is just at the moment it might be too soon for them to act unless things take a turn for the worst. Q: Reports indicate that there could be a possible stimulus which comes in, in order to spur growth in the Chinese markets. What is your perspective on that? If that does come through, what would be the ripple effect on the global equity space?
A: I think the Chinese government and the PBoC have done pretty well over the last six months to a year in stepping in and intervening at the right times and restoring confidence in propping up the economy in China. There has been a lot of talk about hard landing, soft landing and we are still none the wiser as to what sort of landing we will get there because the PBoC sort of steps in at the right moment and eased the reserve requirement ratio (RRR) for the banks in China.
So they could be coming in again and there is a lot of pressure for them to. We are seeing that the trade balances have been pretty poor, we have seen growth and exports have been much softer than people expected. There is definitely a need for them to come in. It is not that urgent but the fact that they are coming out, you have seen it today with risk assets start to rally across Asia and I think once they actually push the button you would see a spike in equities in China and the knock-on-effect affect in Asia and hopefully across the globe as well.