Expect QE3 before expiry of Operation Twist: Finaport

With US economic fundamentals deteriorating, Hans Goetti of Finaport says that the third round of quantitative easing can be expected before the Operation Twist expires on June 30. “This being an election year in the United States, we think that the Fed might be tempted to come up with another liquidity programme, especially when the economy slows down,” he added.

Global markets are correctly experiencing a correction phase due to weak economic data world over, but Goetti says things will pick up once again in Q4. Talking specifically about the India, Goetti says the market is near its bottom so it looks like a buy right now. Below is an edited transcript of his interview with Latha Venkatesh and Reema Tendulkar. Also watch the accompanying video. Q: Spain seems to be a problem area once again for Europe. What's your outlook on the developed markets now and do you expect some sort of a correction or will QE bail them out? A: We are now in a correction mode. We have had a very good first two months of the year and this correction was overdue because technical situations of the market had actually started to deteriorate quite rapidly. What we also see is deterioration in economic fundamentals. The first two months in the United States for instance were characterized by very strong growth due to one off factors, such as the warm weather which was very unusual, skewed the data on the positive direction. So, we are seeing now the economy slowing again and of course that could possibly be a trigger of a QE3 down the road. In fact this could happen within the next two or three months, probably before Operation Twist expires on June 30. Q: Do you think that downsides are limited for risk assets, equities and commodities and we could see some kind of a strong performance in second half? A: If you look at 2010 and 2011, we had a very similar development in the equity markets. A strong Q1 followed by weak Q2 and Q3 and then a very strong Q4; this year seems to be shaping up in a very similar way. This being an election year in the United States, we think that the Fed might be tempted to come up with another liquidity programme, especially when the economy slows down. So we think that the downside risk this time around might be a bit more limited. But fundamentals are really not that great because earrings growth rate is slowing down and usually equities are quite sensitive to that. So what we are bullish on still are bonds because we have deflationary tendencies in the economy. Anything that has a yield of greater than 4%, that is high yield bonds and high yield stocks, will be a theme. So we like that part of the market, not everything but part of the market, especially the income theme with high returns. Q: Do you worry about a hard landing in China and does it have the capacity in itself to derail the world economy? A: If there is a hard landing, it would have the capacity to contribute to a downturn, but we don’t think that’s the case. You have seen loan growth in China going up very much in March. It think it was about 1 trillion Renminbi that was loaned out, out of the target for the full year of 8 trillion. In the first two months the loan growth was slower, but it seems to us atleast that when loan growth picks up you tend to have a re-acceleration of the economy. Q1 growth was 8.1%, below some expectations, but that does not constitute to hard landing. I think hard landing can be avoided for this year, but 2013-2014 might be a different story because we have loan growth of 30% per annum, you have the property market that is in a bubble and at some point there is payback time, but its not going to be this year. Q: We are expecting a rate cut on April 17 in India; will that make you buy India? A: The market has already discounting it. We had this pullback; we are probably close to the bottom, so I would think it’s a buy at this point.