Market to focus on implementation risk of reforms: Rabobank

The Indian government has taken a lot of bold measures over the last many days. In an interview to CNBC-TV18, Adrian Foster, Rabobank says the market is now focusing on implementation risk. "These reforms have indeed caught some investor attention," he adds.

Below is the edited transcript of Foster’s interview with CNBC-TV18.

Q: What have you made of this despondency setting over Europe? Do you think it is going to be temporary and that it will only be a matter of time before Spain asks or bailout? I guess Rajoy is himself waiting for his home state to finish elections, so is it just playing for time and we should take the cut today, very seriously?

A: There is big element of playing for time, it is true across the euro zone, but in Spain in particular. There are a lot of domestic, political machinations going on between the national government and some of the regional governments. There is high potential political cost for the Prime Minister Rajoy to go to the Troika and ask for a bailout.

So our assessment is that they will have to strong-arm Spain into requesting a bailout when it looks as if it is the best option of the available few, then indeed Spain will request such bailout, is our best thinking on the issue.

How long will this stand off continue? It could go on for little while because the ECB has bought quite a bit of time; going back to LTRO 1 and LTRO 2 and indeed with the outright monetary transactions (OMT) standing ready to buy government bonds in the secondary market.

Q: What is the call now on emerging markets per se, are they likely to out perform developed markets or under perform?

A: I am structural optimistic on emerging markets. But the problem that they always face is when there are strong global downdrafts, then they tend to get reflected around the emerging markets.

Whether that is just the real economy trend path through the export channel or indeed something a little bit less clear like the financial channels. History tells us that it is unrealistic to think that emerging markets in this part of the world, can significantly outperform when there are indeed strong global downdrafts in the developed world.

Q: At Rabobank what are the assets that you are recommending from now up till end of 2012 given the kind of data you getting from China, given the way in which crude has trended or perhaps not trended above USD 112 per barrel mark, what are your top three asset classes?

A: There is a small positive for the region in all price trends across the region by and large as an oil importer, so lower prices do tend to just take the reins off the respective economies. But, investors have to be realistic and that is all eyes on Europe. You have to access where the up and down path coming out of Europe.

One thought we had for quite a while is that policy makers in Europe to indeed have the wherewithal to hold this together, but the market needs to force them into taking some of the more radical decisions. Periodically when we are looking over precipices; when the market doubts that European policy makers will pull something out of the hat, indeed they do and that will continue.

When markets looks particularly weak, we should be looking at opportunities to buy into dips because indeed policy makers Europe and US have shown quite a hyperactivity to take these sorts of policy measures to reduce the downside risks.

Q: Give us a word on India because we have seen significant amount of inflows in the Indian markets, are you getting a sense that perhaps people are pulling out money from the other emerging markets and increasing their weightage on India and therefore these inflows might continue despite what happens with the rest of the global markets?

A: The reforms Indian government has announced over the last month have surprised me with their breadth. Multibrand retail in particular is very contentious issue in past of the Indian economy and that is quite a positive infact looking from the far.

Implementation risk is where the market is focused on now, but as a backdrop, that does signal that the government is pushing through some vested interest domestically. I am sure there is a difficult political debate going on behind the scenes in India, but foreign investors do have very strong appetite to get active in the Indian economy as it has always been a regulatory issue, difficult to get involved. These reforms have indeed caught some investor attention.