QE3 on cards; bet on gold, silver: Finaport

The global markets are keenly watching Federal Reserve’s meet on September 13. In an interview to CNBC-TV18, Hans Goetti, Finaport says quantitative easing-3 (QE3) is on the cards.

He doesn’t expect further rally in the equity markets. “I think the rallies, which we have seen for quite sometime now, were in anticipation of quantitative easing. A lot of all this has been discounted. We would not hold our breath as to the length and duration of this rally,” he adds. He says he would concentrate on gold and silver. Also read: Gold futures touch new high of Rs 32,400 on global cues Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Reema Tendulkar. Q: After the big rally that we have seen last week, do you expect more upside in the European markets? A: I think the rallies, which we have seen for quite sometime now, were in anticipation of quantitative easing. On that score, the ECB has delivered. Now, everyone is waiting for the Fed to follow-through. We think that quantitative easing by the Fed is on the cards, maybe even this week, after these awful unemployment numbers or nonfarm payroll numbers. So, there could be a little bit further to go. But a lot of all this has been discounted. We would not hold our breath as to the length and duration of this rally. Q: Have you thought through what we all mean by a QE3? There are some guesses in the market about an open-ended QE plan with no targets mentioned and perhaps bond purchase targets being mentioned every month as we go along. Any options as to what Bernanke might announce at all? A: There are many options. The most optimistic one from the market’s perspective would be if the word ‘unlimited’ was somehow included, if it was not quantified. The last Fed minutes pointed in that direction that it would actually be the case, just a bit like the ECB has done. So, the markets are becoming a bit greedy, let me put it this way. Q: In that case, do you think that by the end of this week we could actually see a retraction of this rally or do you think we are very close to the highs for 2012, especially in the risk asset class? A: With every round of QE, we had a rally. But the rallies keep getting shorter and shorter as a law of diminishing return. The reason for that is because the absolute level of debt is increasing and we get to the outreaches of debt. At some point, that becomes unsustainable. So, the dosages have to be higher and higher. That’s my worry that we actually get QE, but then the market reactions could be rather muted. If I go into risky assets today, I would concentrate on gold and silver simply because what we are talking about here is currency debasement in big style. Best insurance policy against currency debasement is an investment in the only currency you cannot print, which is gold. _PAGEBREAK_ Q: How high is the probability of low interest rates being extended onto 2015 and no absolute announcement of QE3 by way of a number or unlimited or anything by that? Just as statement saying that we will keep all options open which includes QE3, but they cut the interest. They say that interest rates will continue till 2015. How would the markets react to that? A: Everybody expects interest rates to stay low, near zero. Interest rates cannot go up. The national debt in United States has now reached USD 16 trillion. Only a 1% increase in interest rates would mean a USD 160 billion per year of more interest burden. That’s not going to happen. So, interest rates will remain low. That’s baked into today’s market prices. I think anything about the QE3 announcement this week could be a disappointment for the market that could actually see a sell-off. It’s the last chance before the election to do something. Otherwise, we get too close to the election and the Fed could be accused of being biased, so that the next chance after the election would be December 11. We doubt whether the Fed will wait that long. Q: What are you advising investors to do then at this point in time in terms of top three asset picks? Would you want to seriously change that plan after listening to the Fed? A: No, we are playing essentially two investment themes. One has to do with income. The world is starved of income. We are looking at high dividend yield stocks. Ironically, if you are looking for income, you better go into the equity market because now you have higher yields in equities than you have in bonds. If you want capital gains, you go into bonds because we actually think that the 10-year bond yield in United States and the 3-year yield will go lower under any liquidity programme by the Fed and you are not buying those for yields, you are buying those for capital gain. So, it’s basically world turned upside down. Ofcourse the asset class we like the most is gold and possibly silver.