ECB plan only near-term fix; China slump is worrying: F&C

Jeff Chowdhry, head-emerging equities, F&C Investments explains to CNBC-TV18 that though the ECB bond-buying plan is clever, it doesn't solve the problem of boosting growth and reducing debt. Chowdhry adds that the slowdown in the Chinese economy might affect the commodities sector, especially coal and iron ore.

Below is an edited transcript of the analysis on CNBC-TV18. Q: Do you think the markets have run ahead of themselves or are we going to see the rally similar to the one that was witnessed between December 15 and February 15?
A: First of all I would say that the ECB plan announced yesterday was quite clever because though the ECB is ready to stand behind these countries with unlimited firepower, the support does come with conditions and the governments have to come forward and ask for help. However, I am afraid, it doesn't solve the fundamental problem of boosting growth and reducing debt. Q: What are you factoring in for the markets? Will the markets choose to ignore the fact that these countries may not be politically willing to go and ask for help?
A: I think in the very short-term, i.e in the next few days, the markets will want to see that as a glass half full rather than a glass is half empty. But in the longer-term, the issue is much more about growth and in particular, debt which is why ultimately you still need a fiscal union of some sort. Q: Do you believe that a significant fall in the market has averted the crisis? What are the triggers that you are watching out for?
A: I think the other issue is the fact that the Bundesbank has very clearly voiced its opposition against this programme as its views have been steamrollered. Another aspect that one has to be wary of is the fact that bond yields could start rising which would be a negative for the markets as well. Q: Where do you think this infusion of money would go? What kind of asset classes would be favoured?
A: In the short-term, the markets will be right in reacting to the flow of funds to the high- performing economies such as Brazil, Russia and Turkey. Obviously China was strong again today. But once the market starts to settle down and investors start looking at fundamentals, the funds will flow to economies that deliver consistent earnings. Q: Do you expect the markets to hold their firepower for the rest of 2012?
A: I think the markets will either stabilise or go up a bit. However, it it doesn’t really solve the problem.
_PAGEBREAK_ Q: What about the situation in the US? Given the strength of the data, do you expect any easing in the near term, at the FOMC  on September 13 or in November? Is there any expectation from the Fed in the near-term?
A: No, I don't think that is going to happen in the short-term. Bernanke has got a couple of problems. First of all, the economy is doing actually okay and it is not going into a recession though he really hasn’t got an excuse to exercise QE again.
The other problem is that as the US elections near, Bernanke has to be careful about not helping the incumbent getting reelected. So he is in a difficult position. So, I don't think there is going to be much QE from the US unless the economy really tanks between now and November and I don’t think that is going to happen. Q: Is the risk rally the best for the year?
A: I think it can go up a little more maybe by 3-5%. But I don’t think it is going to go much further than that. Q: India has been the second-best Asian market to date and is perhaps the fifth or sixth best emerging market performer again. Do you think this outperformance is at risk?
A: I think one has to always separate companies from policy and government policy. I have always been very skeptic about implementation of measures to tackle fiscal deficit Q: So you still think that as performing companies continue to find money, Indian indices still have some headroom?
A: Yes, certainly in the private sector. Q: What about commodities? We have seen a fairly risk rally pushing up crude prices. Would you want to comment on the trajectory of crude and gold for 2012?
A: I think that the crude prices reflect a couple of things. One, the sentiment of nervousness continues to be associated with the Middle-East situation. Two, there is demand as the US economy ticks along reasonably well.
However, the Chinese economy is slowing down rapidly and as a result of that I don't expect much increase in demand for coal or iron ore. I think they are in a spot of bother over commodities.