Current scenario 'worse than 2008': Deutsche MD

In light of the current global turmoil, Dixit Joshi of Deutsche Bank says that the situation is worse than 2008 as equity markets are not in-sync with fundamentals.

On the sidelines of the World Economic Forum held in Davos, speaking with Menaka Doshi of CNBC-TV18, Joshi said that the uncertainties over China’s economic and forex policy spilled into markets and caused an over-reaction.

Given the present scenario, Joshi said that the US Fed might not hike rates in March, 2016.

“With a strong dollar, companies that have not hedged their exposures will get exposed and we will see corporate bankruptcies going forward,” he added.Below is the transcript of Dixit Joshi’s interview with CNBC-TV18's Menaka Doshi. Q: The question everybody wants to know is whether this is what you would compare to 2008. Last night I was at a dinner where George Soros was speaking and he said this is like 2008 except that time it was subprime, and this time it is China? A: In many ways it is actually worse than 2008 if you just look at the start that we have had this year much of the move that we had has come as a consequence of the devaluation out of China and they are similar to the moves that saw last August as well when the Chinese devaluation created a lot of chaos. However, if you look at the move in the equity markets they are quite out of line versus what the fundamentals actually say. If you look at global growth while global growth is uninspiring right now we are expecting let us say around 3.3 percent for this year. It is certainly not a disaster and we have had an overreaction partly because of the uncertainty around Chinese growth which is quite understandable and also the uncertainty around Chinese foreign exchange policy which as we see more clarity around the foreign exchange policy we might get some more calm. Q: If it is just an overreaction then like you said it will calm down. If it is not and if it is fundamental then what happens? A: We have had a lot of adjustment already happen in the market and some of this does get lost. So, big focus on energy, for example this year. If you look at high yield spreads energy spreads that have moved by 1,300 bps in the last 18 months. If you look at ex-energy spread they have moved by about 350 bps. So, the market is already reacting to an environment that becomes more tougher as more corporate defaults and we have seen volatility go up. Q: Is this a market addicted to monetary easing, quantitative easing (QE) because we just had to hear from the European Central Bank (ECB) yesterday and he indicated he will take more action in the next meeting and there you have gotten the global markets are all back and smiling and you have got to think maybe there is no way out except for cold Turkey? A: We have had this unprecedented experiment and we are in fresh territory here. We have had about 7-8 years of one way easing right now. So, you have the Fed where we are expecting three rate hikes who might not actually do the March rate hike. You have the ECB with Draghi confirming yesterday that ECB would continue with easing monetary policy and if the Bank of Japan (BoJ) injecting still around USD 60 billion a month into the markets. So, it looks like that is here to stay. Fortunately what QE has done is actually underpin growth, for example in Europe. So, we are achieving growth of around 1.5 percent. The bigger issue is really when the structural reforms get done in Europe and that will be the tell-tale sign that would allow us to ease off from QE. Q: Can I argue that the structural reforms will never get done until the monetary tap doesn't shut off. Till you have got that going, till you got that giving people this false sense of security and this false sense of calm no government is going to make the difficult decisions that it has to? A: The good part here is that Europe has actually begun to have the conversations. If you look at the Brexit debate potentially that might have spurred some of the conversation around this which is when do we have a focus on growth and when does Europe ever focus on efficiency. So, my hope is that that gets addressed because solely through the structural reforms and increase in productivity that we can win ourselves of QE. Q: When do you expect for this monetary tap to shutdown and for markets to come back anywhere close to real levels? A: I would look at the Fed as a great example. By signalling that we actually want to win ourselves of the policy, you might stretch out that timeline depending on what happens with the markets, clearly what has happened out of China in the first couple of weeks of this year. It might actually lead to the second hike been postponed. However you have started seeing the markets now readjust. You have started seeing emerging markets re-price. You are starting to see money flow back into dollar. So, all of the easy money that flowed out is actually starting to retreat somewhat. That will cause some pain in some sectors and in some countries but it is a necessary adjustment that we need to make. My point would be that the markets are adjusting right now, potentially further adjustment will come but we have started on that journey as opposed to ignoring the fact that we will reach higher rate some time. Q: The IIF put out some data which suggested that in 2015 we saw somewhere in the region of USD 700-800 billion of outflows from emerging markets, this is equity and debt included and that this year we will see another USD 400 billion of outflows. What is that going to mean for markets like India that are substantially lower from where they were when the Modi premium was playing out? A: The emerging market story I think needs to be separated between the sovereign and the corporates. If you look at the sovereign balance sheets right now, sovereigns have high reserves, lower debt, they have a stronger current account position right now, their currencies are more flexible and their currencies are cheaper. So, I don't think we will have a crisis like we did in the 90s around sovereigns. If you look at the corporate story, it is a slight different picture. There is around USD 3.5 trillion of dollar denominated debt issued by emerging market issuers, about a third comes from China and around 15-20 percent between India, Turkey and Brazil. The good news with those issuers is much of the issuance is from what we would call high quality emerging market countries - China, Korea, Singapore etc. However with the higher dollar and a higher cost of funding in dollars companies that have not hedged their exposures or don\\'t have large dollar earnings are going to be exposed and I have no doubt we will see some corporate bankruptcies in this space. So, 2016 looks like it might be okay given the amount of cash on hand to meet redemptions, liabilities coming up. 2017 could be the real test. Q: You said that the markets are in fact readjusting to the realities of this world. How much pain is left? The question I do want to ask you is how much lower are we going to go in India but I know you don't do those kind of levels. A: As a good trader you try not to call the bottom or you try not to call the top. Q: Are we anywhere close to the bottom, do you see that there is more pain left in this? A: I think you still need to look at, we talked about China but look at for example oil which has also caused much of the movement for example in the United States in the equity markets. You have had a wave of indiscriminate selling which is also related to oil. If you look at oil, oil is down about 75 percent from two years ago and down 25 percent now. It is not dissimilar to the last time we saw this in 2008 when really because of demand oil had collapsed. If you look at the moves in the market they are overdone, healthcare has got sold off, banks have got sold off, technology has got sold off for no other reason except there is a derisking which is a consequence or a derivative of the oil market. If you look at the moves or the sentiment around oil which is filtered into the broader market, it is out of kilter with the real impact that energy can have. The energy sector makes up roughly 5 percent of capex in the United States not more, makes up less than 0.5 percent of employment in the United States. If you look at earnings per share on the S&P ex energy, earnings per share is up 2.5 percent but if you look at the S&P earnings per share was down last year slightly. So, I think it is an outsized reaction and lot of the adjustment is taking place currently. Q: So, are we anywhere close to the bottom in India? A: I would say India is in a slightly different position. It has been for a while. The fundamentals in India versus the rest of the BRICS and the EM space have actually held India in a different set. So, if you look at currency volatility, Governor Rajan highlighted this at the World Economic Forum this week that has seen less volatility, probably more volatility than people might like but less volatility than other emerging markets have had because of the strong position that India had entering this phase.