To stem eurozone’s slide towards deflation, the European Central Bank (ECB) launched a massive euro quantitative easing (QE) programme beginning March until September 2016. Geoff Lewis, ED, JP Morgan Asset Management says buying euro 60 billion (USD 68 billion) of assets every month during the period, aggregating to 1.1 trillion, is a big commitment that may result in European equities outperforming S&P 500. "2015 will be a year of ample global liquidity," he said adding a lot of the money will flow into emerging economies including India.
Speaking about the possibility of Greece exit from Eurozone, Lewis said the country is not in a position to bargain. It is understood that Greece, after polls on January 25, may see Syriza-led government in power which is known to demand concessions from its European creditors. But Lewis says ECB QE is more important than outcome of polls and it is given that the ECB will take a fairly hard-line with Greece.
Below is the transcript of Geoff Lewis' interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Latha: How would you read yesterday’s European Central Bank (ECB) announcement. What kind of assets do you think are going to receive this big money that comes out of the ECB? A: It is going to be a broad range of private and public sector assets, so we will see buying in covered bonds, we will see encouragement of Asset Backed Securities (ABS) and of course we will see sovereign bonds purchases distributed inline with the European Central Bank’s capital case. So sovereign quantitative easing (QE) of 1.1 trillion euros beginning in March and carry in through till September 2016 – that is a big commitment. Therefore, Magic Mario, he is the man of the moment, he has met expectations even though those expectations were quite high. The ECB’s action is warranted. We are in a situation where inflation expectations at the five year level were following, they needed to take action and they have done so. So, yes very good news indeed.
Latha: If you can tell us what would be your top three assets that you think will receive this kind of money, would it be US equities, Indian equities, any kind of fixed income instruments? A: When you say receive the money; the ECB is going to be purchasing European government bonds. The yields are already at record low, so I do not think those assets are particularly attractive to investors but what this commitment to unconventional monetary policies from the ECB does, it ensures that 2015 will be a year of ample global liquidity, no credit crunch even though the US might be raising rates in the second half – that is supportive of risk assets generally and equity markets across the globe, as you say. Year to date the stock index until yesterday was about 6 percent whilst the S&P was flat. So, definitely European equities have been in the lead and that is quite natural when the stimulus is taking place in an economy where expectations have been very low. It does not take much good news now on the euro zone economy; I think to see further outperformance from European equities relative to the S&P 500.
Latha: If you can tell us what would be your top three assets that you think will receive this kind of money, would it be US equities, Indian equities, any kind of fixed income instruments? A: You say receive the money. The ECB is going to be purchasing European government bonds. The yields are already at record low, so I do not think those assets are particularly attractive to investors but what this commitment to unconventional monetary policies, it ensures that 2015 will be a year of ample global liquidity, no credit crunch even though the US might be raising rates in the second half – that is supportive of risk assets generally and equity markets across the globe. Year to date the stock index was about 6 percent whilst the S&P was flat. So, definitely European equities have been in the lead and that is quite natural when the stimulus is taking place in an economy where expectations have been very low. It does not take much good news now on the euro zone economy to see further outperformance from European equities relative to the S&P 500. Sonia: We have another big event, the Greek elections on Sunday. What is your expectation from that and if there is a Grexit then do you think it could cap the gains that equity markets have made courtesy the ECB policy? A: In the short-term it’s always possible that few days gains could be given up by a negative political event somewhere else. In terms of importance, I would say action from the ECB ranks number one level of importance, the Greece election much further down the scale; of course they are very important to the Greeks, they are very important to the kind of government the Greeks vote for. Greece is not in a particular strong bargaining position to rewrite its debt restructuring agreement with the IMF and the ECB. So Greece is not in a strong bargaining position. They could bargain for slightly better deal for change in some of the terms on their agreement, maybe maturities will be extended. I do not think that forgiveness is on the table and the ECB will take a fairly hard-line with Greece. Sonia: We have another big event, the Greek elections on Sunday. What is your expectation from that and if there is a Grexit then do you think it could cap the gains that equity markets have made courtesy the ECB policy? A: In the short-term it’s always possible that few days gains could be given up by a negative political event somewhere else. In terms of importance, I would say today’s action from the ECB ranks number one level of importance, the Greek election much further down the scale; of course they are very important to the Greeks, they are very important to the kind of government the Greeks vote for. Greece is not in a particular strong bargaining position to rewrite its debt restructuring agreement with the IMF and the ECB etc, so Greece is not in a strong bargaining position. They could bargain for slightly better deal for change in some of the terms on their agreement maybe maturities will be extended. I do not think that forgiveness is on the table and the ECB will take a fairly hard-line with Greece.
Latha: What is your attitude to the Indian market? We are seeing it gaining in strength sometimes by the minute as it were. Do you see it being generally a gainer because of easier liquidity? What kind of gains do you see at an index level in 2015 from India? A: We do not unfortunately give projections of index level for the Sensex for the end of the year. I would feel that the ECB’s action is helpful to the emerging markets, it removes the threat of a global liquidity crunch in 2015, it strengthens the surge for yield and emerging markets equities will benefit as well as US and European equities and Indian has strong fundamentals, so we are not going to see a major risk off episode for the emerging markets and so that is a good news and money will start to flow again after the outflows we have seen over the last month; there were outflows in January and India will continue to attract decent share of the total amount of money going into emerging A-share equity markets from foreign intuitional investors. Sonia: In the interactions that you have had with a lot of other institutional investors across the world, what is the outlook on India because there has been a huge outperformance already, a lot of the reforms are getting priced in even as we speak. Is there still a lot of optimism and is there fresh money being pumped into the Indian market? A: I think we can see reasonable amount of money coming in. there has been fresh money gone into the Indian government securities market. We found outflows from emerging nations for the last five months but in almost all those months, in second half of last year, there were still small net positives into India. So India is in a favoured position because of its strong fundamentals and valuations are no longer cheaper; they are not particularly expensive either, so valuations are not strong barrier. Investors are looking for growth. There is still a scarcity of good growth stories and India stands ahead of the pack in that dimension. Latha: Is there any particular sector or stocks that you like in India, where you would add in incrementally? A: We have seen good run up in the banks and the financials. I think domestic cyclical, infrastructure capex related still have quite a long way to go. So basically domestic bias, consumer discretionary certainly, we favour all these areas currently.
Sonia: What is your expectation from the Federal Open Market Committee (FOMC) policy later this month and if there is any hawkish commentary from the FOMC, will that then overtake the mood in the market or sour the mood in the market? A: The hawks are more in the minority now. Yellen and the dovish camp are firmly in control. Do not expect much change in the wording. They changed it last time; they are going to be patient. So, no real major change in the next FOMC.
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!
