Euro crisis may affect Asian mkt outperformance: Rabobank

Although the global markets are moving higher, a major rally is not evident. Adrian Foster of Rabobank feels that though there were some very downbeat expectations, positive surprises have been sprung up recently. Moreover, he is cautious about European equities, particularly because policymakers may address some of the complexities of the European situation.

The Fed however might introduce stimulus measures that would provide positive cues for the market, opined Foster. "Though this time around there isn't signs of further easing, inflationary pressures are clearly leaving the door open to further stimulus from the Fed," he told CNBC-TV18.
However, Foster is not very optimistic about the Asian markets if the Eurozone crisis persists. Here is the edited transcript of the interview on CNBC-TV18. Q: Global markets appear to be trudging higher, but unable to make a big leap. Where do you see global equities headed now?
A: I think there has been a bit of a lull in the data flow of late. If you just hit back the last couple of weeks, the data that tended to be on the less negative side of the ledger. So of course, relative to some of the very downbeat expectations of only a couple of weeks ago, there have been some modest positive surprises. It's worth keeping in mind that many European policymakers are actually on their summer holidays at present, probably just finishing up this week and will be back at their desk this week.
There has also been a bit of a lull in some of the foot-in-mouth tendencies that we see from some of the European policymakers, for example, arguing against the policy position of somebody else. There has been a little bit of support on both sides of the ledger, the fundamental plus also perhaps the psychological side for markets.
Interestingly though, particularly on the European front, with policymakers getting back to their desk this week, I think there is the risk that we start seeing little bit more of the complexities of the European situation coming through with some prominent people possibly arguing against some of the views that the ECB has put on the table in the last couple of weeks. I am suggesting caution after the recent run up that we have seen in European equities in particular.
_PAGEBREAK_ Q: How seminal would the FOMC minutes be in the context? Would people read it with a fine toothcomb to check whether there are any suggestions of a quantitative easing and if that was not there would that be a trigger to sell at all?
A: I think there is a fine toothcomb on the horizon for the US Fed. But, perhaps more will be brought out for the upcoming Jackson Hole symposium. Of course, it was two years ago at this event when the Fed Chairman started talking about QE2. Interestingly, though this time around there isn't signs of further easing and inflationary pressures are clearly leaving the door open to further stimulus from the Fed.
But, just a little bit better signs on the economy in the third quarter than the second quarter and keep in mind of course that the Fed Chairman can't speak for the FOMC. So he needs to be guarded in what he is putting on the table and what he is discussing. I think there will be a fine toothcomb brought out particularly in his speech at the Jackson Hole. It will be somewhat more balanced than the 2010 edition.
But, I think there will be some intimation there. Some stimulus measures are there on the horizon and I think the market might just get a small positive out of that at the time. Q: Are you expecting negative headlines coming out of the European policymakers' meetings? Several of them are lined up later this week.
A: That's right. As we just discussed, a lot of policymakers will be back at their desks for the first time in a while in Europe after the summer holidays. I think there is some scope for the complexities of the situation to perhaps hit the headlines. We should be ready for some contradictory statements from pretty senior European leaders.
Of course, it goes to the heart of why this European issue is dragging on so long. There are just so many decision making bodies at the supranational, national and in fact in the regional level in some countries, all with a very important role to play. They quite often have some different opinions on what should be done and who should pick up the cost for those actions. So yes, there is considerable scope for some contradictory statements and perhaps a little bit of disappointment to hit the market. Q: How do you expect Asian equities to perform in that case? India for instance has seen decent amount of FII flows in the month of August. Practically every single day we have seen inflows something between USD 25-125 million, pretty unusual compared to the record in the rest of 2012 or earlier in 2012 except perhaps January. We have not seen such a good record and the performance of the stock market also has been somewhat chart breaking. You could say that of Korea as well, maybe Nikkei of course not at all in the same category. Do you think Asian equities will also see a lull?
A: I think it's worth reminding of course and your comments allude to it but hope springs eternal. Money typically has a very short memory and is always on the lookout for the next opportunity. I guess the challenge for investors is not to get jaded as we see these repetitive sort of cycles of European hope followed up by European disappointment.
I think that's a very important point to keep in mind. But I think it's unrealistic to think that Asian markets will outperform to any marked extent, if indeed Europe does see tensions escalating there again. I think it's just a fact of life that Asian markets will reflect trends in the bigger markets like the US and the eurozone. Periodic bouts of tension in the eurozone will be reflected in weakness in local markets. It's certainly something that local investors need to keep on their radar screens. Q: Specifically on India, what's your sense? The Nifty has been breaking its resistance levels, consolidating perhaps over the last two or three days, would you say that there is scope to buy India now?
A: I think perhaps the market's getting more comfortable with the idea that the rupee is not about to be retracing. The weakness of the last 7-8 months or so, year or so, in that sense the currency is a little bit of a synergy factor for the local market and that's a positive.
It's because it has seen some sizeable falls at these times of European tension and as I said, I don't think that's going to be repeated. I don't think we can avoid that reality. I do think the main cyclical driver of Indian markets is indeed events in the eurozone and that's going to continue to be the main driver until the market gets confident that the eurozone is really on its final path.
The markets are prepared to accept the final path will take a bit of a time to pan out but when we see much less contradictory statements from European leaders, I think that's going to be an underline positive factor for European markets and in particular Asia Pacific markets. Q: With respect to the money which is coming into the Indian equity markets, any idea what color of money is it? Is it ETFs or long only funds?
A: To be honest, I don't have any insight there. I do think that in an underlying sense there is a high appetite amongst global investors for participation in Indian markets. As we have discussed before, I think there is a challenge there for the Indian policymakers to make it a slightly easier market to participate in. But I think there is underlying demand there. As I said before, hope springs eternal and that's equally true of Indian market as well.