Despite the bounce back in global equities seen on Monday, Micheal Every of Rabobank continues to remain cautious on stocks. Most investors are simply happy because it appears as though a US Federal Reserve rate hike is being pushed back, without realising that if indeed a rate increase is pushed back it is because all is not well, he told CNBC-TV18. He advises investors to sell into the rally.
He does not think this cheer can last long. Soon the reality of the situation will catch up — be it in the form of poor earnings growth or the Fed not hiking rates because of the economic situation, he says. Rabobank, however, expects to see a rate hike in December.
Every, however, is fundamentally positive on India. He expects the country to benefit from low commodity prices and from the fact that it is a large consumption driven economy or market. However, he is quick to add that all these factors are already priced in.
Below is the verbatim transcript of Michael Every's interview with Latha Venkatesh & Sonia Shenoy.
Latha: How do you explain this risk on rally, simply because a Fed hike is off the table for the whole year?
A: I think what we are seeing is a bit of a short squeeze and a bit of over optimism on the part of the market, thinking that yes, because the Fed isn't going to be hiking - the all is well with the world.
I think what they are overlooking is the fact that the Fed isn't hiking because all is not well with the world, but unfortunately in the near term the market, if you thinking rationally like that and we are getting quite a significant swing to the upside.
Latha: But how long will the good times last?
A: It is possible that we will continue to see an upside in the next couple of sessions. But I don’t think it is going to take too much in terms of a shock from corporate earnings or aggregate economic data for the market to start realising that hang on there is a downside to this but frankly the Fed aren’t moving isn’t because they want to continue giving out free sweets and candy to everybody but because the economy just isn’t strong enough to handle it.
Sonia: Will you sell into this global rally?
A: Personally I would maybe not exactly at this level, I might let it go a little bit further first of all but I certainly wouldn’t be expecting it to go very far.
Sonia: When are you expecting the Fed to hike rates because the expectation now has moved into the early part of 2016?
A: For the moment, our houseview is still sticking with December. Now to be fair, we were saying December when everybody else were saying February or March. So we have been by far the most bearish in the market.What we think at the moment is that the Fed is painted themselves into a corner. Their rhetoric has been so strong that they need to raise rates. It is going to be very hard for them to climb down because they have pulled the ladder up from under their own seat that means they are very likely to have to do something they don’t want to have to do anymore, which again will be very negative for equity markets._PAGEBREAK_
Latha: How do you approach the market like India? Here it wasn't just a technical rally. We have seen foreign inflows increase substantially. Do you think that a fundamental view is changing here?
A: Fundamentally I am positive on India. This global backdrop is negative most places but the particular combination of ingredients we have got globally is positive for India. However, what you want to see is slow global commodity prices, what you want to see is market looking for large domestic consumption based economies which is what India is. Therefore, on that basis it's all looking pretty good. Unfortunately a lot of it is priced in and just because the fundamentals are good, it doesn't mean that we can move that much further to the upside given where equity markets are already trading.
Sonia: Equities as an asset class - how much of returns would you expect from here for the next six-eight months?
A: My primary focus at the moment is preservation of capital. I am not looking to try making any gains at all. So to my mind if India outperforms everybody else by being completely flat for the next 6-8-12 months, I consider that to be a real achievement.
Latha: Oil has formed a bottom you think or is this just there again a technical support?
A: As I always say oil is a very complicated commodity and most large investment banks have a team of 100 people who continually get the oil forecast wrong.
However, at Rabobank we specialise and decide that we have a much smaller team to try and get the oil forecast wrong and our view is that we will see a gradual pick up towards the first half of 2016 but it's going to stay in a low range for longer than previously, have been expected.
Sonia: Do you expect more bad news from China?
A: That I certainly do. The Chinese economy is continuing to experience problems and those problems are structural rather than cyclical. So yes, we will still see further worrying headlines coming out from China and that is to be expected. I don’t see how that can turn around in the near-term.
Latha: Do you mean the good times may last only up until Wednesday? Thursday the Chinese markets open.
A: I did say that I was primarily gloomy, it is nice to try and put a date on that gloominess. That is entirely possible. Obviously it is very hard to pinpoint exactly when sentiment will turn again but to my mind it doesn’t seem that it is sustainable at these present levels a too much longer.
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