Rabobank sees reforming EMs drawing ECB QE:Advantage India?

Jan Lambregts, Director, Head of Research (Asia) at Rabobank International does not expect the European Central Bank (ECB) to give a full-fledged plan on Quantitative Easing (QE)  in today’s meeting. Even if ECB chief Mario Draghi gives an outline to the plan, Lambregts says the actual buying of bonds will start only by March.

There is a widespread expectation that the ECB will likely unveil a bond buying programme to the tune of 50 billion euros per month.The key issues that the ECB is likely to tackle are the extent of liability sharing and the size of the package. According to Lambregets the liability sharing is likely to be limited but the size of the package could be bigger. He says, history has shown that quantitative easing has always augured well for equities, so it seems a good time to buy equities but all this seems to be already priced in and one may not see a new leg to the rally. Infact, the QE money will flow into those emerging market that have seen policy reforms and have decent fundamentals, says Lambregts.

Below is the transcript of Jan Lambregts' interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What is your expectation from European Central Bank (ECB) today, the talk is that it is going to be 50 billion euros per month, higher than expectations earlier isn’t it?A: We are looking at the past couple of weeks, the momentum has been steadily building that there will be significant announcement. We expect them to give us an outline, a sketch of what they plan to do that would probably include a headline figure in terms of the size of their original package and some idea about the liability sharing amongst the different member states of the eurozone going forward. We don’t think there will be a full-fledged plan because the complexities are such that will probably take them a number of weeks to work that out, it could not potentially be until early March that is done on the actual buying stocks.

Key issues in our mind are about the extent of liability sharing and the size of the package, we think to compromise with Germany and those who want to move forward is that the liability sharing will be very limited but the size of the package will be bigger so as still to meet market expectations or even try to exceed them.Latha: I accept that liability sharing will be a bigger issue that we will look forward to in details today but still if you can give us an idea of what kind of numbers you are looking at in terms of euro printing and hence the euro dollar, I think estimates are now reaching 1.1 trillion euros?A: We are looking at the medium forecast in some of the big surface out there people are looking at 500-550 billion, for the ECB to exceed that, you would be looking at 750-800 billion and that is what we think is more likely to come to because we think on the liability sharing part, it will be disappointing. The National Central Banks will be taking most if not all of the risk for the moment so that means there is no fiscal union, there are no euro bonds, the liabilities aren’t shared, the composite for that the ECB will want to bring a larger number to the table and that then also matches its goal to ultimately go back to the balance sheet of 3 trillion euros for that they need a trillion in total in purchases and a lot of that will have to come through government or quasi-government bond purchases.Latha: How much do you think is factored into the global markets, do you expect that after the announcement there will be a buy on rumour, sell on news kind of a trend across equity and currency markets?A: I think you make a very good point as in a lot of the anticipation is already here if you may, I think it is a positive for the equities essentially this is one big subsidy to take risk. Central Banks not just ECB but the Bank of Japan in the past of course the Federal Bank, State Bank of England as well were telling you, if things go right and economy recovers then the price to earnings (P/E) ratio out there, the profits will justify that equity markets will go up so buy equity. But if it all goes wrong, we are here to help you with QE, we are here to help you with cheap money and then too equity markets will be supported. So you cannot seem to lose and it almost seems to be always a good time to buy equity at least it certainly did over the past two years and that is a little bit of a story playing out. The question is how much of that juice is still there, how much have we already seen priced in, I think a fair amount of this is priced in. The ECB will try to exceed expectations in terms of the numbers, the liability sharing part disappoints a bit and overall the market could shrug a little bit, moderate positive for equity markets but may not start off a new leg in the rally because we have seen quite a bit of that already.In the currency markets it is effectively locking in euro weakness. We have seen a massive move already in the currency markets in a way that is actually what I think ECB is after, I don’t think they think there was going to be more credit extended at cheap rates to eurozone, consumers and corporates mostly this is about getting a cheaper currency, weaker currency and the ECB has been winning that currency war so far.Latha: Which emerging markets do you think will benefit most if you are tracking them because of this Central Bank munificence?A: I think there is still a potential for this -- people are looking for yield. What the abundance of Central Bank liquidity does is it covers up fundamental shortcomings in some of these emerging markets, some emerging markets are more attractive than others but it makes people find that irrelevant instead all that money needs to be invested somewhere. It is looking for yield, it is the global hunt for yield and a global hunt for returns some of that ends up in emerging markets simply because even though it is a higher risk, there are also higher returns. As people care less for risk and they have that money to invest, they look for those absolute returns, some of that will be heading for emerging markets particularly if you look at some of the emerging markets where there have also been policy reforms but are a decent fundamentals where there are also some lights at the end of tunnel, there definitely the money will be drawn to.