Not much expected from EU meet: Port Shelter Investment

Ahead of the EU meet on October 18 and 19, Richard Harris of Port Shelter Investment Management feels not much is expected from the meeting. At the moment, issues related to the Greece-Troika and Spain's bailout are more important, he added.

Besides, Harris also feels there would be further pressure on commodities mainly because there is less demand around the world. Here is the edited transcript of the interview on CNBC-TV18. Q: Everyone's watching out for that EU leaders meeting which will be held on the October 18 and 19 of this month at Brussels. What’s the key thing that you are expecting from there and is it likely to be a game changer?
A: I suspect it will not really be a game changer. We have had the IMF meeting after this weekend and that really seems to be another case of kicking the can down the road. The US was roundly condemned for QE3, about maybe impacting other nations’ economies and the Chinese did not even turn up. It looks as if they are just moving the meeting from one place to another and this time it is in Europe. Q: What is the sense you are getting about the kind of risk rally that we saw earlier when the QE3 got kicked off after Jackson Hole? Do you think that has now petered out? We are not going to see any more of that risk driven rally in emerging market equities?
A: I think we are looking at events. It is all about how different events are going to come be. I think it is quite possible that this risk driven rally may continue for a little while because QE essentially as far as I can see, is a transference of funds from the Fed into financial assets.
We are seeing reasonable movement in the US in terms of equity prices and indeed house prices are picking up. But, you cannot help feeling that not much of that is going into the real economy. The key thing is, we have some real issues to deal with. We have got the Greece-Troika and it seems for the first time in an IMF meeting the Swedes came out and said, maybe it is better for Greece to actually come out of the euro.
Then we have got Spain and the possibility of a Spanish bailout which we all know is inevitable, but is it going to come soon because the Germans have said they want a much tighter fiscal and banking union in Europe for that to happen. There is an awful lot to play for and I cannot help thinking that we are going to hit the brick wall perhaps as we start discussion on these issues a bit more closely. Q: What is the street expectation on how soon or the timing of Spain going ahead and asking for a sovereign bailout?
A: What happened is Spain actually has been reasonably successful in placing its debt and at levels that are not too outrageous. But, that is partly because the market has believed that there is a bailout in the offing. Do not forget that even if the Spanish ask for a bailout and they have been trying to avoid that because of course it is an admission of failure, the Germans have basically said the money is going to come at a price.
That price is a much closer fiscal, banking and financial union. That does not happen overnight and if it does not happen overnight, if the money is not forthcoming then maybe we could see a crisis next time the Spanish comes to the market or possibly at a time after that. But, certainly somewhere down the road there has to be a point at which there is a crisis in the market and policymakers then realize they have to act.
_PAGEBREAK_ Q: Have commodities troughed out? Just a few days back a lot of brouhaha on China once again beginning to buy perhaps steel or iron ore. We saw iron ore prices rising and the Australian Index thereby increasing. Have commodities troughed out at all or is this just a temporary technical pullback? Where does India figure in your list of asset classes?
A: I don’t think commodities have really reached the end of the cycle. Of course, prices are going to move a bit. But, it seems difficult to imagine China at a stage where they are all saying, let’s go and buy steel, because they are very much reliant on the US market and the European markets.
The European markets will certainly be in recession in the fourth quarter, even by the rather unusual statistics that have been coming out of there. The US market is certainly not going to take the gap up. I think we are basically going to see further pressure on commodities, mainly because we are just seeing less demand from around the world and that is quite a natural aspect of austerity measures.
In terms of India, I think of course we all know it is altruism and it is completely true that whenever the developed markets sneeze everybody else catches cold. I think that’s the same with the emerging markets. We have had a reasonably good patch in some of the emerging markets, terrible in China of course but, not bad in terms of number from other markets.
We have seen a little bit of a run in the rupee as well. I would not be surprised if the emerging markets actually do take fright if we see some concerns in Europe. I think we have to go through a difficult phase in Europe before we see the recovery come through. As we have seen with the IMF meeting and probably the European meeting this week that policymakers only react when the markets have them up against the wall and we are not quite there yet.