India will gain from global equity rally: Credit Suisse

Robert Parker of the Credit Suisse AMC explains to CNBC-TV18 that the markets have responded positively to the conditions specifying German support to the ESM with a relief rally and fall in Spanish and Italian bond-yields. However, Parker adds, that the flow of negative news will continue in the near-term due to the limited upside in the euro.

The Credit Suisse analyst emphasises that India will stand to benefit from the global rally in equities as the Sensex has performed better than China with the Shanghai Composite falling down to 3.31% YTD. Below is an edited transcript of the analysis on CNBC-TV18. Q: How do you read the developments in the euro-zone on Wednesday - the German Constitutional Court ratifying the European Stability Mechanism (ESM) and putting a cap on the liability at USD 190 billion? Do you think this would increase the upside in global equities?
A: First of all, the decision by the German Court to ratify German support to the ESM is positive despite the fact that a number of reasonable conditions have been added to ensure that the German commitment should be limited to the extent that the country can support the bailing-out of the southern European economies.
I think the market reaction has been positive and has responded with a relief rally as evinced by the fall in Spanish 10-year bond yields to 5.5% and the Spanish equity markets so far, in trading in Europe, are up over 1%. The Italian equity market up 1.25% and the Italian bond-yields are down. Our view is that this equity market rally could continue.
Earlier this week, we decided to add risk by increasing our equity exposure after adopting a cautions approach for the previous two weeks. We hold the view that at least for the next month, this rally in global equity markets will continue. Q: How much more leg does this rally really have? The euro itself has risen to almost 7% since the start of July when Mario Draghi announced his pledge to save the euro. What kind of levels do you expect on the currency and how much is the risk-on?
A: The rally in the euro is completely rationale because 7-8 weeks ago there was a record level of shorts on the euro against the US dollar. The rally that we have seen on euro dollar from 1.21 to the current level of 1.29 partly reflects the positive action in dealing with the euro-zone crisis, but also largely reflects the unwinding of those short euro positions in the market.
We shouldn't forget that despite this positive news in dealing with euro-zone crisis, Europe still remains in recession and as a result, the growth differential will cap further upside on the euro and I've always held the view that there should be a rally in the euro by 1.28-1.30.
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And we are right in the middle of that range and I think there is not going to be any further upside on the euro much beyond 1.30 unless there is some very negative news from the US. The upside beyond 1.30 is limited because at least in the short-term there will no cessation in the flow of negative economic news despite the positive news on dealing with the crisis. Q: What do you expect from the FOMC meet? Will there be another round of quantitative easing and if so, what kind of an upside do you see in the US markets which have already put in so much of a rally until now?
A: Let’s not forget the YTD (year-to-date) while quantifying the upside. The S&P is up close to 14% and the Nasdaq is up over 19%. Following last week’s non-farm payroll and the unemployment data, which by definition were poor, I think there is a high probability that there will be another round of quantitative easing.
Having said that, I think it’s going to be different from QE1 and QE2 as the Fed will not announce a specific amount and will leave the timing open-ended which in fact is the most intelligent approach. The Fed, I think, is reasonably certain that the US economy will grow between 1.5-2% over the rest of the year.
But obviously the Fed is extremely uncertain regarding the fiscal policy in January 2013. The Fed will announce another round of quantitative easing, but will not specify neither the method nor the size which is the right approach in dealing with uncertainty in fiscal policy. Q: Have you changed your outlook on India? There are expectations that India may not be on the top of the list of emerging markets that the funds from the liquidity boost maybe routed...
A: The first point I wish to make, obviously, is that the India has been one of the top performing emerging markets this year. So the Sensex 30, as you very well know, YTD is up over 16% which is excellent as compared with China YTD which has performed exceptionally badly- the Shanghai Composite is down 3.31% YTD. Only some of the smaller markets like Thailand have managed to outperform India.
So we are now in a situation where I think that the rally in the global equity market is supportive for the Indian market and has created a major valuation difference between India and China.
Investors and markets are eager for clarity on the political situation in China and indications that the economy will begin to perform in the fourth quarter. But I think in late October, the Chinese economy could catch up with some good performance.