Liquidity to remain benign globally: Macquarie Sec's Gibbs

In an interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, Richard Gibbs, Global Head at Macquarie Securities said he believes liquidity will remain benign globally. The European Central Bank (ECB) on Thursday cut interest rates to a fresh record low. The central bank has cut benchmark interest rate to 0.05 percent from 0.15 percent and marginal lending rate to 0.3 percent, while deposit rates have been slashed to -0.2 percent from -0.1 percent.The aggressive shift sent short-term bond yields into negative territory in Germany, France, the Netherlands and Austria, giving investors an overwhelming incentive to sell euros for higher yielding assets elsewhere.“The focus will shift to bond markets in emerging markets (EMs) in the medium-term,” Gibbs told the channel.

Below is a verbatim transcript of the interview Latha: As a person looking at emerging market equities what are your key takeaways from what Draghi said and did yesterday?A: Basically this plays the same way as quantitative easing measures in the other economies of the G4 economies that we have seen to date. We would expect to boost overall global liquidity. That obviously means that liquidity is freed up and it is going to be looking to enhance yield in terms of investment return and that really puts the emerging economies in the frontline basically for that surge for yield that will inevitably follow as a result of not just the cut in interest rates seen in the European Central Bank (ECB) area but also of course the asset purchases that will now occur which will dry financing yields and overall yields down even further in relation to investment return. Latha: Obviously this has had its combatant impact on the euro going below the 1.3 level, do you expect much further weakening of the euro and as a counter would you expect the dollar index to go on rising over 83 or well over 83 and will that mean at some point in time triggering any kind of a risk off in emerging market equities?A: The euro is already priced fairly well on the anticipation of a move to full blown quantitative easing. However it is important to remember that Draghi’s media conference signalled the intention to engage in an asset backed securities purchase program. We do not yet have the details of that, BlackRockers are currently working on that that were commissioned by the ECB to take on that project a week ago. They are good but they are not that good, they haven’t yet got those details together. So we are going to precisely know the timing or the nature and extent of this asset backed securities purchase program and that will have a big bearing on where we see that capital outflow going, how much of it comes out of the euro area and of course that is what is going to be the determinant of how much further the euro depreciates. Sonia: You did mention that the liquidity situation could remain benign but how much of a liquidity do you think could flow into emerging markets like India and what is your stance in the Indian markets now after the big run up?A: I suspect it has been a big run up and it is the best performing of the ten major markets. We have certainly been pleased to see that and that has been our underlying view. We are now reaching a point where we can reasonably expect some consolidation. If you look at the multiples relative to the Morgan Stanley Capital International (MSCI) for emerging markets we are running at eleven and half on the emerging markets and we are running in India at over 15 times. So there has been a fair bit of expectation priced in there.My suspicion is, and notwithstanding what you just said earlier about the fixed income market, that we will start to see the focus swing back towards emerging bond market as industries are looking to pack those funds coming out of the Eurozone in the high yielding markets. So I suspect we will see more foreign investor activity and demand on that side and a period of some consolidation in relation to the equity side.