US shares dropped the most in three weeks overnight as worries over Greece and as inflation data drove expectations the Federal Reserve may hike interest rates sooner than later.
In an interview with CNBC-TV18’s Sonia Shenoy and Anuj Singhal, Rabobank’s Micheal Every termed the situation as a “bizarre new normal” where positive economic data in the world’s largest economy triggered a fall in stock prices while weak data made them rally.
He, however, said the Federal Reserve was unlikely to hike interest rates soon – not sooner than the later part of the year.
Over the long term, Every said he was positive on the Indian stock market, more than he was even on the Chinese market, which has rallied 50 percent this year.
“We’ve seen selling pressure here recently but the growth picture is still pretty good. Yes, we want to see further momentum on reforms but India can still grow faster than, say, the US whichever way you measure it,” he said. “I fail to see why equity investors won’t differentiate between the long-term growth story and the US market that’s only supported by ultra low interest rates.”
The Chinese market, on the other hand, “smacks of a bubble”, Every said, adding that investors must remember that “what goes up can definitely come down”.
Below is the transcript of Michael Every’s interview on CNBC-TV18.
Anuj: What is worrying you more, what is happening in US or what is happening in Europe? What is worrying investors more than emerging market?
A: Europe has been a long standing worry. We not had any new development there so I do not see there is any particular reason for the sell-off today stemming specifically from Europe. Much more of it is led by a reaction to what we saw in US equities yesterday after we got better than expected US economic data. And this really underlines the new bizarre normal that we get better economic data out of the US and the equity market sells off. We get worse economic data out of the US and the equity market rallies. If that does not tell you that something strange is happening then nothing does.
Sonia: But what did you make of the comments coming in from the US Fed reserve where Stanley Fischer said that a rate hike may trigger a lot of global volatility. Do you see a move away from risky assets like equities into treasuries in the near-term? And, would you expect to see the first rate hike from the Fed sooner, rather than later?
A: Let me start with the second part of the question. How our view remains that we will not see the first rate hike until December and that is if the data continues to remain good. We have seen a very soft patch in the US economy recently. Yes, we had some good numbers yesterday, but overall it is still the later part of the year that we see the Fed actually do anything.
Now, let us go back to the comment about volatility. To be honest, again, it is a no-brainer. Yes, if we do start seeing rate hikes from the Fed, we will see volatility in equity markets, we will see volatility in treasury markets, too. We will see volatility in Foreign Exchange (FX) markets; there will not be any area in the market that will be untouched by volatility, which is exactly the reason why they are waiting for the last possible moment to do so, in our books.
Anuj: Specifically on India and the kind of pressure that we have seen on the currency market. Do you think there is a risk that the Indian currency breaks the previous low and maybe the Indian equity market also tests the previous low?
A: It is always a possibility of every outcome. I have to say that while we have definitely seen selling pressure recently. I keep reiterating that overall the fundamentals are still fairly positive. Yes, we want to see further momentum towards economic reforms. Yes, globally we are seeing a lot of headlines saying ok we are one year into ‘Modi-nomics’ now. When do we actually really start to get some traction? And that is obviously seeing some people then decide to lock in some profits against the background of rising global volatility and worries about US interest rates. But, overall, if you look at the growth feature in India, it is still pretty good. India is still going to be growing more rapidly than the US. However you measure it going forward. And I fail to see why equity investors would not be at a differentia between a long-term positive growth story and market that is being only supported by ultra-low interest rates in the US; I am surprised that they cannot see the difference.
Sonia: One expert yesterday was indicating that the theory now is that current account surplus countries; the likes of Taiwan, etc. will continue to see fund inflows versus current account deficit countries like India losing out on inflows purely because once the rate hike comes then there will be a currency move on the downside for many markets like India. Would you buy that argument? And in terms of the pecking order of investing into equities now, what are your top preferences?
A: Again, let us look at the current account issue. Obviously, if you have a large current account deficit, that is a negative fundamentally for any particular currency. But what is important is the change. If you are running a five percent deficit this year, and last year you had a six percent and before that a seven percent, the market can actually say, “Hey, you are moving in the right direction!” And it does not make any difference that you are running a deficit at least they can see that you are improving. The same thing for countries running a surplus; If you are running a larger surplus, but it is declining, the market is more likely to be nervous rather than reassured. So, it is directionality rather than the outright level of where the current account is that is of some importance when you suddenly get into a more volatile market, when there is a concern about liquidity. In terms of actual equity picks, I am afraid I do not make specific calls; I look at the bigger picture rather than an individual company.
Sonia: My only question was will we lose out to other markets like China in due course of time? Because, we have seen a huge outperformance of the Chinese markets versus in India.
A: Over time, depending on your time frame, I remain positive on India for exactly the fundamental reasons I was just talking about. This is an economy that can grow quite comfortably at seven to eight percent in real terms, maybe 2 percent in nominal terms, 13 percent even depending on inflation year-after-year going forward. In China, the absolute opposite is true, We already have slowing real growth, nominal growth which is declining quite precipitously and major concerns about where growth will be a year or two years from now. Now, if Chinese equities are up 100 percent, year-to-date, if you are in Shenzhen and then around 58 percent, if you are in Shanghai, but I would be extremely nervous about how long this particular market can be sustained. It absolutely smacks the bubble for me. And what goes up can very definitely come down, one should never forget that
Sonia: We are seeing a bit of pressure in the global markets, especially in the US. Do you see more of a sell-off in risky assets like equities in the next two to three months?
A: That very much depends to the data direction. If we continue to lean towards Fed rate hikes in the second half of the year, there probably will be some people deciding to lock in profits, step back from equities a little bit and maybe even sit on cash for a while and wait and see what the market looks like when the dust settles. But it really does depend on the data picture going forward.
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!
