EU in stronger fiscal, debt position than before: Rabobank

The debate on whether Greece will remain in the eurozone or exit the common currency is still unresolved. The European markets seem to have taken this on its stride, offering constant signs of volatility.

In an interview with CNBC-TV18, Adrian Foster, Financial Head Research, Rabobank said that the uncertainty in the European markets will continue for the next one or two weeks. The result of the 17 June elections in Greece can finally decide the fate of the markets, believes Foster. Also Read: Will partial rollback of petrol price hike impact market?
Although, the weakness of the euro is also visible, Foster pointed out, "Stand back and look at the euro zone collectively. It's in a lot stronger fiscal position and a lot stronger debt position, taken in total, than indeed the US just by way of an example." He further added that Indian markets are heavily driven by sentiment and suffers from a weakness relative to its Asia-Pacific peers. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: How are you viewing the turf now with respect to the European markets and a Greek exit?
A: I do think that's a lot of bad news priced in to European markets and I think this window of danger will continue for a week or two longer. If you think about what upset the market in the last couple of days is comments by former Greek Prime Minister Papademos that there were some preparations made for a Greek exit from euro. Now of course, the international investment community heard that message loud and clear and didn't like it.
But, I think that message was actually directed at the Greek voters to impress upon them to start the choice they'll need to make collectively, on June 17th, during the next elections. It is likely that we will see some more of those stark comments, again indirectly aimed at the Greek voting public. This is something that the international investment community will have to come to grips with through the next week or two, of course beyond that, on June 17th we will have an election result.
At that point, I think, we might be surprised that Greeks actually voted a bit more rationally than perhaps it appears at the moment. I think Greece is utilizing Europe. It is beyond my field of expertise but, the basis on which I am going forward is that indeed Greeks will vote to stay in the euro zone. That means keeping their foot on the break if you like, on the austerity front. Q: This is a view that many experts voice as well that the contagion perhaps is already priced in to most of the equity markets. Do you think that if it does not get too worse from here, we could see some favor towards cheap, risky assets perhaps it would be a good time to work to put some money to work in the equity markets?
A: Of course everyone needs to think about their own risk appetite. I don't have an insight there. But, I do think we have been through a process where a lot of bad news is been put on the table. We have seen quite a brutal reaction in many markets plus we got a little bit longer to go through this danger period.
Over the next week or two, I think we will see some pretty volatile markets. Beyond that of course, it comes down to just the decision the Greek voters collectively make. I tend to think, even if there is a surprise negative outcome from the Greek election, you will see the rest of Europe focusing more on the firewall that they need to put in place to safeguard against the more realistic option for a Greek exit after that election. At that time, we might see that the outlook is perhaps not as negative as it does currently look. Q: What is the view on the entire currency space because the euro is at 21 month low versus the dollar? How are people viewing the fall that we have seen in the currency market and what that is portending?
A: It's difficult to come up with uncorrelated positions at the moment. We are seeing high correlation between euro versus the dollar and indeed the global equity picture and the weakness in euro is reflective of the weakness that we are seeing across equity markets also.
Euro very much will be buffeted by the same sort of forces that will impact the equity markets in the next couple of weeks. We are still in that danger zone. A little more downside is likely to take place. Stand back and look at the euro zone collectively. It’s in a lot stronger fiscal position and a lot stronger debt position, taken in total, than indeed the US just by way of an example.
I think when downside feeds to the extent that is being widely discussed aren't realized, then in a month or two there is little bit more upside indeed in euro or looks like that in the next couple of weeks, if we indeed have the bumpy ride that I think is likely. Q: Where does Asia fit into this entire picture because the manufacturing data from China has not been too good? We have seen the way Hong Kong has fallen in the last couple of weeks; it's been day after day of 500 points falls on the Hong Kong equity markets. Do you think that the pressures are not yet over from the Asian markets?
A: I do think those global forces will continue to be reflected around the region. Of course we talk about correlation in asset markets but, there is also a correlation across many of the economies around the world because we are so integrated. I may believe if you like, Asia Pacific region's out performance story is relative to the developed world.
When you get a strong developed world, economic swing, economic cycle due to the inter linkages does get reflected around the Asia Pacific region. I think it's unrealistic to think that's not the case we saw in 2008 most certainly. We are going to beat the winds of global forces and I think we need a calming in global financial markets before the region's out performance can reveal itself. Q: How does India fit in this entire emerging market outperformance and would you recommend investors to pump in money into the Indian equity markets?
A: I think the thing with India is it does seem to be quite a heavily sentiment driven market. Periodically, in the past, I have been optimistic until we could see 2-3% moves and we are not getting 8-9% moves. You look to 2-3% downside; you end up with 5-6% downside.
It's a heavily sentiment driven index and suffers from a weakness relative to its Asia-Pacific peers. Of course India runs a current account deficit and historically has a heavy reliance on portfolio capital inflow to fund that deficit. But with so many global financial institutions in a challenged environment, internationally, stemming from Europe largely, that portfolio capital is hard to come by. That weighs on the rupee.
It really is the transmission mechanism for international stresses in the finance sector into the Indian economy. I think when India moves, there will be quite handsome percentage gains to be had. I wouldn't be too comfortable to say that we are going to see it in the near term. Though I think we need to see a bit of a calming in global markets to see that come through.