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Last Updated : Aug 24, 2015 04:25 PM IST | Source: CNBC-TV18

Rajan was right on QE: 'Currency crisis behind market woes'

The recent measure by the Chinese government to devalue its currency was leading to a global fear of a competitive devaluation race. As well, the Fed's expected exit from its zero-interest rate policy is leading to an outflow from emerging markets.


Equity markets globally have been roiled in a slump that has roots in several global macro issues, ranging from a slowdown in China, and the consequent decision to devalue the yuan, to the impending decision by the US Federal Reserve to raise interest rates.

Chinese shares are down 37 percent from their peak this year. Other emerging market equities too are down but not by that much. The Nifty has slipped from a peak of 8,600 recently to about 8,000.

In an interview with CNBC-TV18, Viktor Shvets of Macquarie blamed the recent equity market bloodbath to the deflationary environment prevailing globally, "something that equities don't like".

"Deflationary pressures are rising globally. The only way to offset them is central bank generated liquidity. [But] there is no global recovery," he told Sonia Shenoy and Reema Tendulkar. "Unless we have a significant shift in fiscal policy stance, it's going to worse than better."

Arvind Sanger of New York-based Geosphere Capital had a slightly different view. He said the recent measure by the Chinese government to devalue its currency was leading to a global fear of a competitive devaluation race. As well, the Fed's expected exit from its zero-interest rate policy is leading to an outflow from emerging markets.

Both these points have been made over and over again by Reserve Bank of India Governor Raghuram Rajan in the past, Sanger pointed out.

" [He has been saying that when] Fed tries to get out of QE and getting to raise interest rates, it could cause global turmoil. Unfortunately, he is proving to be prescient and foresightful again as he was before the global financial crisis," Sanger said.

But one expert, Geoffrey Dennis of UBS was less pessimistic.

"The global growth scare is behind the selloff is overdone," he told CNBC-TV18, adding that while it will be difficult to time a bottom, "buying opportunity could emerge soon".

Below is the transcript of Viktor Shvets, Geoffrey Dennis, James Glassman and Arvind Sanger’s interview on CNBC-TV18.

Sonia: It has been a blood bath across global markets this morning. China is down almost 8 percent. How are you reading into the developments that we have had in the last 24 hours and how should investors position themselves now?

Shvets: It depends what investors want. If investors are investors, the view would be different if they are just traders. In terms of what is happening right now, it is very straight forward. We have been discussing for a while that deflationary pressures globally are rising and the only way to off-set those deflationary pressure is central banks-generated liquidity. There is no global recovery; there is no global growth rate. If we don't have very proactive fiscal policy, we will end up with deflation.

As we all know, deflation is not something that particularly emerging market equities like, but the same applies to developed market equities as well. We are seeing a breakdown in confidence that we are going to have growth rates, going to have inflation, going to have nominal gross domestic product (GDPs) as we progress forward. Unless we have significant shift in the public policy stance, it is going to get worse rather than better.

Reema: How have you read the big collapse that we have seen across global equities and commodities over the last few days and what is the way forward? Do you expect the current plunge to worsen?

Sanger: I think that commodity markets have been in a bear market for a while. So, that is not new news. What is new news is the sell-off that we are seeing in the equity markets in a much more broader sense and some of the sectors that were holding up reasonably well are now starting to see a lot of pressure and seeing significant sell-offs.

I think that the problem is that when China did its currency adjustment downward - that set in stage a concern both about China growth and global deflation. One of the things you might have noted in the past is that Raghuram Rajan has been one of the biggest critics of quantitative easing (QE). When you see Fed trying to get out of the QE and getting to raise interest rates, it could cause global turmoil. Unfortunately, he is proving to be pressing and quite fore sightful again as he was about the financial crisis.

We are in a risk-off mode till we figure out where growth is going and what kind of ammunition global government officials and central bank officials are able to bring to bear to cause the deflationary forces to abate. Right now, we are in a mode where investors are shooting first and asking questions later in terms of taking risk-off.

Anuj: What is your call on the US market? Do you think we could be at the beginning of a big bear phase in the US? Is that your sense because the kind of fall that we had last week was quite crunching?

Dennis: My main focus is on the emerging markets, but I think your previous speaker is absolutely right. This all began with the Chinese decision to let their currency slide a little bit because what that did is to raise concerns about global growth about Chinese growth.

I think everything has kind of followed on from there because there another leg down in terms of commodities. I think the global economy is perhaps not as weak as some of the recent market movements would suggest and to an extent, the US sell-off is getting itself overdone at the very least in the short-term.

In other words, something of an over-reaction to the Chinese move - Chinese growth is weak, we know that but perhaps this is an over-reaction to that. And of course, to a certain extent the concerns about whether Fed will raise rates in September also contributing to that. But this has mainly been a global growth scare and we suspect we it may be getting a little bit over done now.

Reema: How does India looks relative to the other emerging markets in this correction that we are seeing?

Shvets: India remains largest relative overweight within Asia except Japan. Nobody is good, but India is relatively better positioned and there are couple of reasons for that. India is a commodity consumer and not commodity producer. India usually would like to have sort of a goldilock between US dollar and currencies as much as possible to still attract some capital - to still have some degree of cyclicality without going stagflationary. In India, at this stage, inflation is unlikely to get out of range and out of bounce.

The only negative is earnings expectations and multiples, but multiples don’t really matter that much anymore. I don’t really put a very high value on the relative multiples.

However, we are in a position whereby people are just looking at the flashes and don’t see the pattern. It is a global pattern - one day it could be China, next day it could be eurozone, the next day there is a little bit of snow in the US, the next day it could be Middle East or Ukraine. There is a pattern of circular stagnation.

You cannot accelerate demand or investment and a trade no longer grows. So, we have a degree of de-globalisation occurring. So, it is not just China, it is not just reaction to China because around the corner there will be something else. It is simpler reflection that we are just growing too slowly and that gives you the volatility.

Sonia: Come in on that, the point that Victor was making about it being a cocktail of bad news globally that is dragging most markets. Is this reminiscent of the situation that we were facing in 2008 and do you see the global equities now move into a big bear phase or that fear overstated?

Sanger: Everything is not going to be a global financial crisis like 2008 was which was particularly underlined by the collapse of Lehman and the resulting fall-out in global financial assets. So, I am not sure it is comparable.

It is significant if it is not just a growth scare as one of your other speakers mentioned. But if it is, coming into question the very long-term effectiveness of QE and therefore, of global growth after all this quantitative easing globally is still proving to be extremely stubbornly low and deflation is proving to be extremely difficult to kill.

I think it does raise questions of have we reached the limits of policy action and that is the case, crisis maybe too strong a word, but a new kind of a headwind for the markets to deal with. US is probably still relatively better off, but global growth looks extremely weak and commodities.

And even within the US if you look at some of the sectors like transports and industrials and others, they were all already in the corrective phase before this recent sell-off.

So, I do not think it is just commodities but there are other sectors which were giving signals of what are classically considered to be factors that suggest that global growth or even US companies represent global growth were seeing headwinds. So, there are underpinnings here which suggest that global growth is facing question marks and till we get a clear answer to that, markets are likely to stay under pressure.

Latha: I was hoping that Asia would find some kind of a bottom today since the Chinese Purchasing Managers’ Index (PMI) number was already available to us when we were trading on Friday but it looks like this global growth scare has gotten worse?

Glassman: It is hard to tell this is a global growth scare. Clearly things are slower in China and that is a worry but there is also a realisation that in the US the outlook is changing, the Federal Reserve is getting closer to beginning a slow process of normalising interest rate and that creates a lot of uncertainty but the truth is we are not looking at a radical change in policy.

We are looking at a very cautious move by the central bank and that's what people are expecting. If it starts in September -- it might be that if today were the day maybe the central bank will hold up because it is hard to do these things in disorderly markets, but the truth is we look at the US economy and the US economy is in pretty good shape and it doesn't require interest rates to be so low and the sooner the Fed can start the more gradual they can make this whole adjustment.

Therefore, I think there is a lot of uncertainty about that and when you see
market behave the way they do, this is in little bit of exaggerated and it might be because market is very thin and as the numbers starts going on and people are just nervous until they see where this goes.

Nigel: The last time you joined us you were confident that September is when we are going to see that high coming in and you even told us that very poor economic data will be needed for them not to hike rates. What is your take? Are you going in with that forecast of September, are you expecting that hike to come about or you have pushed that to the end of the year post what has happened recently?


Glassman: I am expecting this to start. I know the Futures market has scaled back this probability quite a bit but economies in general; US economy because of the way the economic data playing out, generally expect this to happen in September.

It is not so much of the economic data call for this; inflation is low everywhere and there is no rush but if you think about the process of adjusting Fed policy, getting things back to normal, they would like to make this very slow.

To me the most compelling argument for starting this in September and I think it does start in September is so that they can break the ice and keep it gradual and that will be a much more easier thing for the market to digest than should the Fed just sit on the sidelines and we told it is absolutely necessary and then have to move in a very rapid fashion. We do not know yet, the Federal Reserve didn't give any hints in their minutes.

This weekend we have a big annual conference with Fed people. I think most people of the Fed are probably waiting to see what the next round look like before they suggest anything that they might do but they did say in their minutes that they are getting closer to moving to starting this process.



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First Published on Aug 24, 2015 08:56 am
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