RBI won't tighten policy further, says Mark Konyn

For the short-term, chief executive officer of RCM, Mark Konyn expects the outlook for emerging markets to be quite troubled. He feels that India is close to the top of the policy cycle. "We don't expect to see further policy tightening," he told CNBC-TV18.

He indicated that the yen is always a safe haven in such a situation. He further stated, "The flat to quality suggests that the dollar will stay stronger."

According to Konyn, if the markets come down, they would capture a large part of the downside. In the short-term, not for many investors, investing has become a spectator's sport, he added.

Here is the edited transcript of his interview. Also watch the accompanying video.

Q: What have you made of the recent events in Europe? Do we roll over with somebody finding the money for Greece for the moment or is catastrophe very near?

A: It is a complex situation with not just the Greece circumstances weighing heavy on investor sentiment. Yesterday, we had some disappointing manufacturing news coming out of China and concerns with property developers, having possibly to cut prices to clear stocks because of credit difficulties.

Investors, in this region, are focused on a number of issues and the Greek rollover of debt is one of them. It will take more time to resolve because once Greece resolved, other issues are at stake as well within the Eurozone.

Q: Do you expect anything disruptive to happen? The manner in which bank stock prices have declined globally like Bank of America and several European banks, and downgrades coming in from the rating agencies, can anything disruptive happen in the banking space?

A: Market participants are forcing the issue here because the Europeans have dragged their feet in dealing with this spill over effect of the sovereign debt crisis and its impact on banks.

By pushing prices down, it's forcing the authority to address. What began as a liquidity crisis could become a credit crisis. There is a lack of confidence in number of banks which were marginally close to the criteria of the stress test.

Getting consensus among the member states within the Eurozone has been proven extremely difficult. In the absence of their leadership coming through, market investors/participants have forced the issue more. The underlying issue is being forced onto the table.

We can expect to see initiatives taken by the various institutions, whether it's the ECB or individual government, to arrest the problem and prevent it from becoming a catastrophe or a continent wide issue for the financial system.

Q: Some experts have said that they are convinced that the Eurozone and the US are currently in a recession. Would you concur with that view?

A: As always, we would know if we are in a recession, so you move beyond it. Technically, recessions take two quarters of negative performance from the economy.

We are in that sort of zone now, where there is a lot of evidence suggesting that the order books are slim and economy has slowed significantly. There has been a significant slowdown in the market from where expectations were at the beginning of the year.

Q: What are your thoughts with regards to the emerging markets? Where are they placed in this entire scheme of events, especially India?

A: The outflow from emerging markets has been pretty modular. We have had consecutive eight weeks of outflows from emerging market funds, but we have not seen significant outflows like the beginning of this year. Within that context, Asian markets have faired a little bit better in terms of containing the impact of those outflows.

Outflows from these markets have been less pronounced. The short-term outlook for emerging markets is quite troubled because these economies have been a concern. The reason for this is high inflation level, and need for central banks and authorities to tighten monetary policy and bring the inflation situation under control.

At the point now, including India, we are very close to the top of the policy cycle. We don't expect to see further policy tightening. Therefore, we need to see some good news on the macro level because markets are not trading on earnings. The investors are that concerned about multiples or the earnings outlook.

We have seen deterioration in the earnings, but not sufficient to justify or validate the hypothesis that we are in recession. The global issues, whether it's the US job market or the Greece debt crisis in Europe or concerns for the European banks have been driving the markets.

Q: Where are you advising your clients to put their money? If cash is king, then in which currency should one hold that cash?

A: We have been witnessing a flat to quality short-term, which is pushing the dollar higher against the euro, sterling and various other currencies. Asian currencies generally have faired poorly in the last week or so.

We have not seeing them give up quite a large amount of their significant gains from previous this year as investors have begun to be concerned about global growth. A lot of those funds from debt positions and is now being unwound. The money is being pulled back from Asian currencies. So, we can expect that to continue for a little bit longer.

The flat to quality suggests that the dollar will stay stronger. The yen is always a safe haven in such situation. In the short-term, in the absence of any clear leadership, it will be the dollar for many investors. Many portfolios are trying to capture both the upside potential, but limit the downside.

The hedge is not particularly convincing because if the markets do better than expected, the hedge will not allow those portfolios to make a significant headway. Similarly, if the markets come down, they will capture a large part of that downside. In the short-term, not for many investors, investing has become a spectator's sport.