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In an interview with ET Now, Mark Matthews, Head of Research-Asia with Bank Julius Baer, gives his views on the global markets. Excerpts:
ET Now: Globally do you think it is time to be optimistic now? Whatever could go wrong has gone wrong. Italian bond yields have shot up, there is a run on Spanish banks, a visible slowdown in China and the US economic data has been mixed.
Mark Matthews: I am glad you asked that question because it is easy to panic in times like these. Usually we look back and realise that panicking was not the right thing to do.
Having said that, there are differences between this and what happened last year. In my opinion, the big bounce in the markets last year was due to the LTRO from European Central Bank in December and February.
This time, the President of ECB has said that the onus is on the governments in Europe to get their acts together and he is not going to do the LTRO again. Whereas last year, the US looked very weak and a lot of people were anticipating a double dip, this year the US looks fine, but China & India have slowed down faster than what people had anticipated.
So, emerging markets are under scrutiny this year. Anyways, I personally do not think Greece will leave the Euro in a disorderly fashion. There are still a lot of policy risks in the current year.
ET Now: Do you think the Greek election outcome on June 17th will be extremely critical and dictate which way the European markets and world markets are headed in the near term?
Mark Matthews: Could be. The left-wing coalition has said they do not intent to abide by the terms of the existing package. If they do manage to get into power, there could be a disorderly departure of Greece following that.
My sense is that even if there is a very strong response to the departure from the governments and the central bank in Europe, it will be another big let down to the markets before they rebalance. So the event is important.
ET Now: As of now, recession is official for Europe. Do you think it is a matter of months and it will be depression which will be official for you?
Mark Matthews: Looking at the PMI's which came out last week and particularly the soft reading in Germany, it looks like the balance which the people had hoped for in the second half is not going to happen. It is safe to say that the European economies are going to be much weaker than the street is currently forecasting.
ET Now: First it was US Fed, then ECB, now the Chinese Central Bank has indicated that they are aware of the economic growth slipping and will print more money in order to get growth back. So, what kind of potential scenario are we staring at? If central bankers print more money, it amounts to more asset-price inflation, more money to crude and emerging markets.
Mark Matthews: I do not think that is correct. The ECB has said quite emphatically they are not going to print any more money. I do not think there will be a QE3 from the Fed. Unless I missed an important news headline, I do not think that the PBOC has any intention of doing quantitative easing either.
They have cut the reserve requirement ratio (the amount commercial banks have to keep as a percentage of their deposits with the central bank) by a 150 bps. It is still a fifth of all their deposits that has to be kept with the central bank, which is a very high number.
So I do not see the picture which you are painting. The response of the Chinese authorities to their slowdown has been overstated. I do not think they will do anything major because they are actually secretly delighted that their economy is no longer growing fast. It is politically important for them to try and push down asset prices and inflation because there has been a big rift between the rich and the poor in the last 10 years.
ET Now: Where does India lie amongst the global scenario which is looking so wobbly and news-heavy? We have our own domestic problems like a slide in currency, ballooning deficit and a whole host of downgrades coming in for GDP and equities. How much more pain for equities from the current juncture?
Mark Matthews: Actually, in this kind of an environment, India would be usually doing well. India is the largest uncorrelated economy in Asia to the rest of the world. The economy is driven by its own domestic consumption.
Unfortunately, the story is not very robust on the ground. There are many reasons, but the largest in my opinion is policy paralysis, as the term has become defined, which is existing for the last two-and-a-half years. I do not see that changing.
So ordinarily, the fall in commodity prices like oil, gold and coal would be good, but as you also pointed out, the rupee has fallen even more. So, it is not going to be the kind of the market that people run to for safety.
ET Now: What to your mind is the true value for the dollar index, the dollar index which we use in India for benchmarking purposes; currently is at 82.
Mark Matthews: I do not have a forecast for that. But as far as the rupee goes, I would say 52 is roughly the value. So, it is slightly undervalued now.
ET Now: Are you surprised that even though the US economy is not doing all that well, global money managers are still pulling money out of emerging markets. They are pulling money out of commodities and are revisiting dollar-denominated assets, especially US treasuries which offer just a yield of 1.7%.
Mark Matthews: I disagree with your observation on the US. The US is doing well and that will creep up on us continually. The theme over the last 10 years was BRIC. It was a good theme 5-10 years ago. But, for a variety of reasons, I do not think it is a good theme right now. The slow and steady recovery in the United States will continue to unfold and the United State will continue to outperform.
So, half the reason why the dollar is strong is because the Euro is weak. But another half of the reason why the dollar is strong is that the US economy continues to slowly recover.
ET Now: So for the next five years, you are a bull on US equities, you are not a bull on BRICS and especially Indian equities. Can I safely interpret that?
Mark Matthews: I cannot forecast about the future. Broadly speaking, yes. Markets are cyclical because economies are cyclical.
The US has been on a down cycle for the last 10 years and is gradually starting to turn up. The emerging markets have been in a big up cycle for the last 10 years and are gradually starting to turn down.
ET Now: What is your own estimate of how much GDP growth India is going to see for FY13? Most brokerages have lowered their GDP target.
Mark Matthews: Somewhere between 6 and 6.5%. GDP is slowing down in China, Russia and in Brazil as well.
The static number itself is not as important as the direction in which these things are going. As I say, direction in the US on the whole is positive whereas in the emerging markets it is negative.
ET Now: What do you make of the investment climate in India? The investment ratio in India has been falling at an alarming rate and savings are coming down. So, two basic verticals: investment is down and saving also seems to be losing up?
Mark Matthews: I actually do not follow it as closely as I should. But it is intuitive that there will be less investment in an environment like this, primarily because of the government's policies. One would be much more reluctant to make a sizable investment in the country given that there has been a lot of backing off on policy. There is still a lot of overhang.
ET Now: If I have to ask Mark Matthew for his top investment idea for the next three years, what would it be?
Mark Matthews: One thing I feel very comfortable in telling people to own, although it is not a financial investment per se, is real estate in the United States. It is deeply undervalued on a historical and relative basis.
It is gradually starting to appreciate in value. The US dollar will appreciate gradually. So the real estate in the United States is a very attractive investment.
India not a market investors would run to for safety: Julius Baer - The Economic Times
ET Now: Globally do you think it is time to be optimistic now? Whatever could go wrong has gone wrong. Italian bond yields have shot up, there is a run on Spanish banks, a visible slowdown in China and the US economic data has been mixed.
Mark Matthews: I am glad you asked that question because it is easy to panic in times like these. Usually we look back and realise that panicking was not the right thing to do.
Having said that, there are differences between this and what happened last year. In my opinion, the big bounce in the markets last year was due to the LTRO from European Central Bank in December and February.
This time, the President of ECB has said that the onus is on the governments in Europe to get their acts together and he is not going to do the LTRO again. Whereas last year, the US looked very weak and a lot of people were anticipating a double dip, this year the US looks fine, but China & India have slowed down faster than what people had anticipated.
So, emerging markets are under scrutiny this year. Anyways, I personally do not think Greece will leave the Euro in a disorderly fashion. There are still a lot of policy risks in the current year.
ET Now: Do you think the Greek election outcome on June 17th will be extremely critical and dictate which way the European markets and world markets are headed in the near term?
Mark Matthews: Could be. The left-wing coalition has said they do not intent to abide by the terms of the existing package. If they do manage to get into power, there could be a disorderly departure of Greece following that.
My sense is that even if there is a very strong response to the departure from the governments and the central bank in Europe, it will be another big let down to the markets before they rebalance. So the event is important.
ET Now: As of now, recession is official for Europe. Do you think it is a matter of months and it will be depression which will be official for you?
Mark Matthews: Looking at the PMI's which came out last week and particularly the soft reading in Germany, it looks like the balance which the people had hoped for in the second half is not going to happen. It is safe to say that the European economies are going to be much weaker than the street is currently forecasting.
ET Now: First it was US Fed, then ECB, now the Chinese Central Bank has indicated that they are aware of the economic growth slipping and will print more money in order to get growth back. So, what kind of potential scenario are we staring at? If central bankers print more money, it amounts to more asset-price inflation, more money to crude and emerging markets.
Mark Matthews: I do not think that is correct. The ECB has said quite emphatically they are not going to print any more money. I do not think there will be a QE3 from the Fed. Unless I missed an important news headline, I do not think that the PBOC has any intention of doing quantitative easing either.
They have cut the reserve requirement ratio (the amount commercial banks have to keep as a percentage of their deposits with the central bank) by a 150 bps. It is still a fifth of all their deposits that has to be kept with the central bank, which is a very high number.
So I do not see the picture which you are painting. The response of the Chinese authorities to their slowdown has been overstated. I do not think they will do anything major because they are actually secretly delighted that their economy is no longer growing fast. It is politically important for them to try and push down asset prices and inflation because there has been a big rift between the rich and the poor in the last 10 years.
ET Now: Where does India lie amongst the global scenario which is looking so wobbly and news-heavy? We have our own domestic problems like a slide in currency, ballooning deficit and a whole host of downgrades coming in for GDP and equities. How much more pain for equities from the current juncture?
Mark Matthews: Actually, in this kind of an environment, India would be usually doing well. India is the largest uncorrelated economy in Asia to the rest of the world. The economy is driven by its own domestic consumption.
Unfortunately, the story is not very robust on the ground. There are many reasons, but the largest in my opinion is policy paralysis, as the term has become defined, which is existing for the last two-and-a-half years. I do not see that changing.
So ordinarily, the fall in commodity prices like oil, gold and coal would be good, but as you also pointed out, the rupee has fallen even more. So, it is not going to be the kind of the market that people run to for safety.
ET Now: What to your mind is the true value for the dollar index, the dollar index which we use in India for benchmarking purposes; currently is at 82.
Mark Matthews: I do not have a forecast for that. But as far as the rupee goes, I would say 52 is roughly the value. So, it is slightly undervalued now.
ET Now: Are you surprised that even though the US economy is not doing all that well, global money managers are still pulling money out of emerging markets. They are pulling money out of commodities and are revisiting dollar-denominated assets, especially US treasuries which offer just a yield of 1.7%.
Mark Matthews: I disagree with your observation on the US. The US is doing well and that will creep up on us continually. The theme over the last 10 years was BRIC. It was a good theme 5-10 years ago. But, for a variety of reasons, I do not think it is a good theme right now. The slow and steady recovery in the United States will continue to unfold and the United State will continue to outperform.
So, half the reason why the dollar is strong is because the Euro is weak. But another half of the reason why the dollar is strong is that the US economy continues to slowly recover.
ET Now: So for the next five years, you are a bull on US equities, you are not a bull on BRICS and especially Indian equities. Can I safely interpret that?
Mark Matthews: I cannot forecast about the future. Broadly speaking, yes. Markets are cyclical because economies are cyclical.
The US has been on a down cycle for the last 10 years and is gradually starting to turn up. The emerging markets have been in a big up cycle for the last 10 years and are gradually starting to turn down.
ET Now: What is your own estimate of how much GDP growth India is going to see for FY13? Most brokerages have lowered their GDP target.
Mark Matthews: Somewhere between 6 and 6.5%. GDP is slowing down in China, Russia and in Brazil as well.
The static number itself is not as important as the direction in which these things are going. As I say, direction in the US on the whole is positive whereas in the emerging markets it is negative.
ET Now: What do you make of the investment climate in India? The investment ratio in India has been falling at an alarming rate and savings are coming down. So, two basic verticals: investment is down and saving also seems to be losing up?
Mark Matthews: I actually do not follow it as closely as I should. But it is intuitive that there will be less investment in an environment like this, primarily because of the government's policies. One would be much more reluctant to make a sizable investment in the country given that there has been a lot of backing off on policy. There is still a lot of overhang.
ET Now: If I have to ask Mark Matthew for his top investment idea for the next three years, what would it be?
Mark Matthews: One thing I feel very comfortable in telling people to own, although it is not a financial investment per se, is real estate in the United States. It is deeply undervalued on a historical and relative basis.
It is gradually starting to appreciate in value. The US dollar will appreciate gradually. So the real estate in the United States is a very attractive investment.
India not a market investors would run to for safety: Julius Baer - The Economic Times
