Global equity markets will remain volatile: Andrew Freris

Last Updated: Wed, Nov 07, 2012 04:10 hrs

Global markets have been cautious ahead of the US Presidential election. At the domestic level, the euphoria post the announcement of key policy measures is already fading. Andrew Freris, chief investment strategist (Asia), BNP Paribas Wealth Management, tells Puneet Wadhwa in an interview that markets will now look for gross domestic product (GDP) growth and corporate earnings upgrades to justify trading at higher levels. Edited excerpts:

Do you think markets have fully discounted the problems across the Euro zone and the possible outcome of the US Presidential elections?

The EU (European Union) markets have performed strongly after the ECB (European Central Bank) bonds initiative. To that extent, the decrease in risk in some euro assets is already in the price. The US Presidential election will involve a major political problem in resolving the "fiscal cliff" issues irrespective of who wins.

Just like in September 2011, when there was a short-lived bloodbath in the US markets over the related issues of the US downgrade and the raising of the fiscal ceiling, the inability (or unwillingness) of US politicians to resolve the fiscal issues before the elections, means that after November 8 and till December 31 (the fiscal deadline), there could be a lot of volatility in all equity markets.

The rift between China and Japan policymakers, as seen in the last IMF (International Monetary Fund) and World Bank meetings, triggered growth concerns for these two economies. Should one be alarmed?
I consider these rifts of no real significance. The IMF can affect policies of countries which borrow from it (Greece for example), but the differences between China and Japan, to the extent that they impact their respective domestic policies, are really of no concern except to the Chinese and the Japanese.

In any case, it’s a myth that China propels the world economy, as China is not, and has not been an exports driven economy. Like Japan, (it) is a big economy, driven mostly by domestic factors. It can impact the prices of some products (iron ore), but as none of the G3 economies (the US, Europe and Japan) are commodities exporters, the role of China in their business cycles is very limited.

Do you think the recent policy changes in the Indian context could culminate in the Union Budget 2013, post which, we could see the euphoria fade and the markets drift lower?
The Indian government took a big decision which could have a political cost but equally points to the future policy directions. It may appear that the necessary majority could be mustered to implement these proposals.

I feel the euphoria is already fading and this is not a criticism, as opening up of domestic markets to foreign direct investment is a process which will take years to implement and see the benefits of. RBI (Reserve Bank of India) has made it totally clear that interest rates could be cut only when inflation is under control and when the fiscal deficit is being addressed. The latter would be an issue in the 2013 Budget and could, therefore, influence rates.

In the Indian context, are you concerned about implementation of the reforms measures announced recently?
Increase in diesel prices and putting a cap on the number of subsidised LPG (liquefied petroleum gas) cylinders will help reduce the fiscal deficit by around 15 basis points for FY13. That may not sound much, but has definitely changed the market sentiment. While the recently announced measures reduce the ‘tail risks’ to the Indian economy and markets, their immediate impact on the economy could be minimal.

After the run-up in September, Indian markets are trading 15 times FY13 earnings, and hence, may take a breather at the current levels. We believe markets will look for GDP growth and corporate earning upgrade in the next two quarters to justify trading at higher levels.

In terms of portfolio allocation strategy, how much are you allocating towards Indian equities, compared to the other emerging and Asian markets? What is your debt market strategy?
There is no standard portfolio and hence, I have no allocation quotas as all portfolios differ depending on size, overall tenor, liquidity and customer risk appetite. The real good news for Sensex will come when (a) inflation has been falling for at least three months; (b) RBI is satisfied with the trend of inflation and progress in reducing the fiscal deficit (possibly after the budget) and hence gets nearer to cutting rates and (c) the valuation metrics in the light of the above begin to look more attractive.

In general, we favour emerging debt markets because of their wide rate and yield differentials to the very low rates offered by G3 government bonds and some good quality corporate. We prefer to look for yield differentials rather than forex appreciation, which in the context of India, might be a wise thing to do give the gyrations of the rupee.

Is it a good time to allocate money to the real estate and precious metal spaces? How do you see the commodity-- agri-commodities and industrial metals-- panning out over the next few quarters?
Real estate cycles correlate fairly closely with interest rate cycles, and while rates are not falling yet in India, caution is advised. Gold is bought because other people buy it. It’s therefore impossible to price it rationally other than to point out that the present low carry cost of gold will continue for at least one year if not longer.

Agro prices have now fallen on the realisation that the drought did not impact supplies as much. There is a potential oversupply of rice. Hard commodities to some respect depend on China's cycle and there, better news will emerge by the second quarter of 2013, when it would be clear that China has passed its growth inflection point.

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