Global cues of late have been outweighing domestic cues, more so with the CBOE volatility index rose above 20 for the first time since early February.
Ramin Nakisa, deputy head of asset allocation at UBS Investment Bank and author of 'Invest in fear - a simple guide to trading volatility' sees a big risk mood and volatility across markets but says it maybe worrisome if VIX rises above 30.
Meanwhile, in an interview with CNBC-TV18’s Sumaira Abidi and Reema Tendulkar, he says that valuations for European market look more attractive than for the US market at current levels.
Below is the verbatim transcript of the interview:
Q: What are you making of the growth concerns that are stemming from Europe and what do you peg the downside to be for the equity market?
A: We have seen big risk off move generally across markets and volatility is obviously going to be plenty which is its long-term average. In terms of VIX, the time when I start to worry is when VIX rises above 30 – that’s the kind of crisis indicate, if you like.
If you short VIX, you could still make profit because we don’t expect VIX to rise up to 30 level. This is more kind of growth worries. I think this is more kind of short-term correction rather than a full on risk off move. Certainly in terms of growth we still see low inflation, modest growth but still positive growth in Europe and in the US. These are over worries. The market seems to be too much rattled by not particularly significant downturns in the data.
Q: How steep could this correction be for the European markets because most of them have already lost more than 8 percent in the month of October itself?
A: Absolutely and that is what we are expecting more this year, more volatility but I think that is a good thing. It shows that the market is pricing VIX better if VIX is moving back close to its long-term average. So, we expect volatility this year though we still think we do not see much upside in credit versus equity, in other words we do not see much better compassion this year to what we are now. So, we still think the better place to be in is equity. We still think core Europe is looking attractive if you look at valuations for example in Germany – that is a very good place to be from our point of view.
Q: When you say Europe is looking attractive, do you mean attractive in absolute terms or relative to other markets?
A: Certainly relative to other markets and that’s the way we always think in terms of global allocation. If you look at valuation in the US versus Europe then Europe looks more attractive also we got to consider the effect of the very weak euro though dollar has strengthen massively in the last two months versus many currencies and this is going to be a big tailwind for earnings in Europe. We won’t see an effect of that till next earnings season so even if we will don’t have a rerating on Europe we expect to see equities quite higher in Europe. I think at the moment Europe is mispricing, banks for example, we think they are oversold, so that might be an attractive way of playing.
Q: What about France in particular – that’s the one which has got a downgrade in outlook from S&P, do you think that will be an underperformer?
A: We watch France’s government bond very carefully to see they have this kind of schizophrenic behaviour where they kind of move from core to periphery because they are still behaving like core bonds, so at the moment we would not panic but there is way about fiscal sustainability. Only two countries have sustainable debt bonds and that is Germany and Luxembourg. At the moment, with Dragi put in place people ignoring fiscal instability but if there is crisis in Europe, if there is some kind of shock then my worry is that suddenly people will start to worry again about what is going to happen to these debt piles that we are seeing still hangover from the crises.
Q: We spoke about Europe as well as US, what about Asia? How attractive are the valuations looking over there because even over there we have seen a bit of a correction and would you recommend a buy on India post the correction?
A: India still looks interesting simply because inflation is under control and we also see growth – that’s the magic combination that we look for plus it looks like you have the most stable currency in this big selloff that we saw versus dollar. The Indian currency is the one that held the best. India is certainly looking attractive but obviously emerging markets (EM) will always selloff in one of these risks off moves but India stood fairly well and that is just viable given the very good macro data we have seen recently.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
