Pent up demand will propel US economy in H2 FY14: Rabobank

In an interview to CNBC-TV18, Adrian Foster of Rabobank gives his view on the US fiscal cliff. He says without any doubt that a consensus on the agreement will be reached eventually. "If indeed like first quarter into the second quarter, there is a fairly clear resolution to it, then there is going to be some pent up demand from the business sector which will propel economy a little bit better into the second half of next year. That is going to be positive for the market," he says.

Also read: With Boehner's 'Plan B' off the table, what now?

On the fiscal cliff negotiations in the US Congress, Foster adds, "If the Republicans cannot agree within themselves, it is very hard to see indeed an agreement formed with the Democratic President." Below is the edited transcript of Foster's interview to CNBC-TV18. Q: How are investors and experts now reading the latest situation in the fiscal cliff negotiation. There’s no vote on Plan B? Are they looking it only as a temporary or prolonged uncertainty or are they fearing that perhaps there will not be a resolution on fiscal cliff? A: Ofcourse, a lot of people focus on the end of this year, when there are some tax changes which automatically kick in on the 1st of January, if indeed no agreements are reached. However, the fiscal cliff taken out in its entirety will actually take a few months to pan out. So, it is not the one-time bang that perhaps some people think it is. There are a lot of elements to it. In that sense atleast it opens the chance that infact this political uncertainty could continue well into next year, rather than just the end of this year. The latest in the ebb and flow of information is that the Congress will not vote on the Plan B from the Republican Boehner. So, that tells us that there is still internal disagreement in the Republican Party as to just what their Plan B proposal should be. If the Republicans cannot agree within themselves, it is very hard to see indeed an agreement formed with the Democratic President. So, it is pretty uncertain as of now and this type of ebb and flow of information will stay with us, probably well into the New Year. Q: If this political uncertainty continues onto next year as well, how are markets likely to react to it? Are they likely to continue to remain subdued? A: My view is not that different than the consensus and the consensus is that ultimately there will be an agreement. When we come upon periodic precipice, there will be agreement, because this is very much a political issue. It’s not that the market is forcing anything on the US. So, that’s the longer term picture. That is the consensus expectation, that along the way it’s unquestionable. There will be ups and downs. Today we are looking at a down day based on renewed uncertainty. My sense is it will be too far away and we will have a little bit of positive news on the issue. I think the US economy is picking up a little bit of steam, so you do not need reasonable level of agreement to see that the actual picture pans out favourably next year. Q: How do you think asset classes will behave or how investors will approach asset classes after the negotiations are done with? One school of thought believes that the economy will be impacted by the fiscal hit and will therefore perhaps fall by 1 percent in terms of one percentage point in terms of gross domestic product (GDP). Another school of thought says that taxes will be USD 150 for the person earning USD 7,000. That is not going to hurt his consumption behaviour much. What is your sense? Will equities basically remain attractive in the first quarter after the negotiations are over? A: Yes. There will be periodic ups and downs. We cannot ignore that. There is weakness in employment and durable goods' order as well. There is evidence that the business side of the US economy putting some plans on hold, waiting to see how these issues gets resolved. If indeed like first quarter into the second quarter there is a fairly clear resolution to it, then there is going to be some pent up demand from the business sector which will propel economy a little bit better into the second half of next year. That is going to be positive for the market. Q: As a banker and a fund manager, how are you approaching commodities? If China is showing some signs of growth, you are noticing an uptick in US. Would you see the first half of 2013 being positive for base metals likewise? What is the view on gold? Will gold continue the downturn that it has seen in the past week? A: I think gold stays supported, although the market is passing on the inflation fear with gold as a hedge against inflation fear. Indeed, this is no evidence of inflation coming up from all these non-conventional policy measures from central banks. So, I think gold stays supported. The underlying story there is end-user demand, India and China are very much a big part of that end-user demand story. On the outlook that the global economy does a bit better next year than perhaps the pessimistic thinking that China does a bit better, India could possibly stumble on a sub-6 percent growth. There is going to be a firm demand condition for gold. I think we will see periodic sell-off, but I do think that there will be some real-end user demand coming through. We will look back in a year’s time and see the gold held up, not to say it has got a whole lot of upside to it.