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Last Updated : Sep 23, 2015 03:18 PM IST | Source: CNBC-TV18

China economy to stabilise but may clock sub 7% growth: UBS

The latest jolt to hit global markets, weak Chinese PMI numbers, may be bad but investors should look out for the services data for the country before taking a view on its economic health, says Hartmut Issel of UBS.


The latest jolt to hit global markets, weak Chinese PMI numbers, may be bad but investors should look out for the services data for the country before taking a view on its economic health, says Hartmut Issel of UBS.

In an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, Issel said he expects Chinese economic momentum to pick up following recent monetary action that is likely putting upward pressure on property prices, and which may feed through the economy.

Below is the transcript of the interview on CNBC-TV18.

Latha: This Chinese PMI number, now does the world have to discount a fresh round of despondency, lower lows in equities and commodities you think?

A: It shouldn’t come as a major surprise that the Chinese PMIs are still quite a bit below 50. Certainly they also have been slightly lower than what the consensus expectations were. I think it is insightful though to deconstruct a bit what happens in general because this is a manufacturing index so this could say a bit more of the economy.

We don’t have the full picture yet, we don’t know about the services side which is almost half now of the economy. So, we have seen just one side and we knew this side was weak.

What is coming or what they have in store also is that especially on the property side which is the weak aspect of investment at this point since March, they have loosened the policy.

So we are seeing in the big cities at least, in the tier-I cities we are seeing prices starting to come up. That will take a bit of time to feed its way through the numbers but eventually you would normally expect that it does feed through the numbers.

So, I don’t want to be particularly optimistic here really on the acceleration but we can still be hopeful on a stabilisation over next couple of months also in China but stabilisation of course on a somewhat lower, probably lower even than 7 percent trajectory on the gross domestic product (GDP) side.

Sonia: Do you expect widespread risk aversion across asset classes because of the poor data that we have been getting from China?

A: We have already seen quite a bit of risk aversion in the market and also nervousness. What I also noticed is it almost changes on a daily basis what markets are nervous about --sometimes it's China, then it is the Fed not being entirely clear what their parameters for decisions are or more recently, the diesel car industry apparently has joined the fray. So, that looks to me to be somewhat indiscriminate selling.

However, at the same time, especially for the eurozone which is our highest overweight on equities, what I do see, if I look at the domestic side, so domestic economy and Europe I see bank lending actually growing again after many years of contraction.

I see lead indicators, composite PMI is on one of the highest levels we have seen in last couple of years. I cannot get that pessimistic about it. Also especially as far as Europe’s own equities are concerned, I would not agree with the notion that the market has to end on a negative note when we see this very encouraging macro data.

Latha: You would be a buyer? If yes where, which countries equities?

A: On the global side, we have the biggest overweight in eurozone equities and I think for good reasons especially now they are really not expensive. They have a very good macro momentum especially in the periphery now.

So, the recovery in Europe is becoming more broth basis, it is no longer just Germany pulling things up in Europe. Spain has started performing, Italy is starting to come back so that is hopeful and the central bank still buying 60 billion euro, building up their balance sheet every month so a quantitative easing (QE) that is also helpful.

That is then followed in terms of preference by Japan but we also expect a bit more QE possibly as early as October. So, we will see probably on the October 30th whether that will happen. In the emerging market (EM) space, we talked about it on the program before; India certainly in relative terms is paying off very well for us.

Sonia: What are you doing with the Indian market, have you increased your allocation in the recent past and what do you expect from here say for the next three to six months from India?

A: What we usually do is, we have for example an overweight on the emerging markets side, so, in our portfolio, what we will do is if markets pull back then we rebalance as we call it. So, if the market is sufficiently low then we buy more so to get just to the regular allocation again. I think that is just the right approach.

Even though the currency may nibble little bit away from it in the next 12 months, we don’t think there is a major risk to that. So, we are seeing a 68 per dollar on the rupee. Even in US dollar, we think India is likely to continue to outperform both in Asia as well as in emerging markets.

Latha: 47 in September, you expect that October is going to be better than 47 at least?

A: Eventually with the stimulus and that is what I am looking at.

Latha: But how far is eventual, do we have to wait October, November? When do you expect the number to at least take a u-turn?

A: On a GDP level which is quarterly data, for Q4 we are going to see maybe a 6.6 percent and then stabilise from there into the Q1. So, it may well be that it is on the November, December when some of these, also the PMI as oppose stabilise.

However, normally you reckon about six sometimes nine months, so, it can vary but those measures have a leg but they started especially property started easing in March. So, we are coming closer to the time when it does help the numbers at least to stabilise.

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First Published on Sep 23, 2015 09:02 am
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