European QE will support EMs, overweight on India: UBS

Below is the verbatim transcript of Geoffrey Dennis and Andrew Holland's interview on CNBC-TV18.

Q: Would you say that this is shock and awe from the European Central Bank (ECB) higher than what the markets had anticipated and perhaps even priced in?Dennis: It was not higher than what our economists were expecting or at least put it this way, the ECB action was pretty much in line with what our economists have been saying. So our view always was that they needed to do probably more than the market was anticipating to have some significant effect and so everyone is happy about the scale of the action but of course euro is a little weaker today but it is not that much weaker. So to a large extent this was priced into the market in truth and yes, it was a bit better than what the market was expecting for sure.Q: What is this now going to mean as far as global markets are concerned. We are already seeing whether it is the US market or the European markets react positively to the comments that had come in from the ECB chief. But what does this mean now in terms of a further trigger for further rally as far as global equity markets are concerned and also emerging markets like India?Dennis: With respect to emerging markets which is what I focus on this is going to continue to be a supportive factor. There is a risk that money could get sucked into European markets in response to the ECB action on QE and there is no doubt at all that our European strategy team is very bullish about developed European markets but one of our themes of 2015 is accommodating monetary policy across lot of the world although we do expect the Fed to raise rates but this action from the ECB. We expect that from a number of other major central banks and we also think a lot of emerging market central banks would be fairly accommodating.So this is all good news for liquidity flow and unless there is a spectacular dollar rally which would be something of a negative for EM I would expect this move by the ECB and the general trend of liquidity policies from global central banks to be positive for emerging market equities.Q: Besides equities do you see this liquidity wave also bolstering sentiment across other asset classes specifically the commodity markets which have been in shambles?Dennis: It is a very fair question. That will only happen if these liquidity moves actually contribute to the sense of a stronger growth outcome for the global economy, in other words I really strongly believe that the commodity prices from here are going to rally significantly. That would have to be on better economic growth. So, you have a long transmission mechanism there. First of all, will the ECB action actually boost European growth, it might do with the margins but I really think this is really more of an issue for corporate earnings growth and for equities generally than it is for commodity market.Commodity markets have been in the shambles but there is some suggestion that the oil price for example may be levelling out now. So, you need to do much stronger growth from here to get commodities moving sharply high and I am not sure the ECB action on QE alone would push those commodities higher. It is a story for equities frankly.

Q: Mario Draghi believes that the quantitative easing programme unleashed today will make a difference as far as inflation expectations are concerned but let us look at the data and let us look at the numbers. Minus 0.2 percent that is the number for December. Do you really believe that this is going o have a significant impact as far as the battle with inflation is concerned and saving Europe from deflation?Dennis: That again really is not my main focus in Europe but our economists certainly do believe that this action will contribute to a turnaround in the inflation expectations. We also make the point, our economists make the point that the inflation story in Europe coming down most recently is of course being contributed to by the drop in oil prices. Eventually that drop in oil prices will drop out of the year on year comparisons and we do expect inflation therefore into the second half of this year begin to pick back up again.So we do think this will work. Our economists also think ultimately the European economies will also improve in the second half of the year. So, it may take a while for this to come through but we do expect this to be a successful move by the ECB and of course if that is the case, that is going to contribute to better equity markets around the world including in emerging markets.Q: Let me ask you specifically about India before I let you go because you believe that this going to be good news for emerging markets but specifically for India since we have already seen such a significant rally play out in the Indian markets, what is the further upside that you see potentially on the back of the action today?Dennis: We continue to like the Indian market. We are overweight in India within our global emerging market equity portfolio. We think actually the arguments for this to has got very little to do with the QE action from the ECB. Obviously there is always currency risk in a place like India if the dollar were to rise sharply but frankly the fundamentals in India have improved significantly in recent months, in particular the current account coming down partly because of oil prices and what that is going to allow people to do is to focus on the domestic fundamentals in India which we think are very strong. We expect the growth rate of the economy to pick up this year and then to rise to six and a half percent in 2016 and with the reforms also moving ahead albeit it will take time to get some of those reforms done.We actually think India is one of the better corporate earning stories as well within emerging markets. So, although it is expensive, although it’s done well, we still think India has some more upside and the ECB itself may not make much difference to that per se but certainly all of this liquidity that has been created around the world will benefit India as indeed it will benefit other markets as well.Q: So given the current context, where do you see the rupee trading?Dennis: Certainly longer term, our economists would expect the rupee to drift lower. Over time it is probably going to hit at some time 65 this year although that is a bit of a move from where we are now. I honestly think that the way investors should look at India and the rupee now is that it is no longer anything as critical or fragile as it was, shall we say, towards to end of 2013.So, although there is probably some down side risk in the rupee, not least because inflation of course in India are all coming down sharply is higher still than in most of the developed worlds. I don't see the currency being a particular risk to Indian investments in 2015.

Q: How do you see the markets reacting to this news tomorrow morning?Holland: We might see a bit of sell on news. This had been pretty much expected. In terms of scale it is a little larger than the market was anticipating. So, all eyes will now be on what Japan does and what China does. I suspect we are going to see more stimulus packages particularly from Japan and in China probably through interest rates they will try to stimulate the economy. So, Q1 is definitely going to see more stimulus, more money try to go into the market. So, it is just a catalyst for other countries to take the lead as well. So, markets are going to be pretty strong in Q1. Q: If we do see coordinated central bank action and it veers towards more accommodative monetary policy and more stimulus whether it is China or Japan and of course ECB has already acted and done better than street was expecting, may be it is sell on news tomorrow but in the short to medium term what kind of a trigger will this particular action be as far as the Indian markets are concerned and what could it mean in terms of levels from here on?Holland: We have been saying even before this ECB stimulus that interest rates would fall by 50 basis points in Q1, we have already seen 25 basis points. This gives the Reserve Bank of India room to do another 25 basis points before the Budget.Q: So you are expecting a rate cut on February 3?Holland: I would not be surprised. I suspect we will see one very soon, after or on around that time. So, 50 basis points is on the cards, it is there. So, the Nifty will probably be around 9000 around the Budget. We are going to have obviously expectations in India about the Budget and what is going to happen. I think we are poised for a further sharp move higher.Q: I want to get your quick comments in on this, I do not know how the markets are going to react but the finance minister speaking today has said that till he balances his books it is going to be very hard for him to give out tax sops or withdraw taxes that people were hoping that he would withdraw. For instance MAT on SEZs. How is the market likely to react to this news? Is it just good smart expectation management or is it going to be seen as disappointment on the Budget?Holland: I think we will go through two parts of it. One, we are going to play out the ECB and the moves by other countries going forward and then we will try and think about the Budget. However we will think more optimistically than we will do by what he said today. Yes it is expectation management but we are all going to forget that and workout that every sector and every company is going to be a beneficiary.Q: Any take on the possible currency risk associated with the liquidity wave that we have now seen being unleashed?Holland: Not really, I think the Reserve Bank of India has done a good job in managing the currency and if anything with the extra 25 basis points before the end of Q1 then may be we could see the rupee to move towards 63 but I think we could be in for a period where the dollar weakens rather than strengthen going forward because the expectations now is that rates will remain a little bit lower in the US for longer than may be people who were coming into the backend of the year.