The news flow of global economic events, particularly in the US and Europe, continues to influence Indian markets. This has been quite stark in the recent past. Adrian Foster, head of financial markets research, Asia-Pacific, Rabobank International, told Jitendra Kumar Gupta, though Indian markets had recovered from their sharp fall in August and were trading at attractive levels, they would remain prone to what happened in global economies and markets. Edited excerpts:
What is your take on the third round of quantitative easing (QE3)?
QE1 was a policy unleashed in the midst of the financial crisis. It makes sense for the US Fed and central banks around the world to experiment and try as many policies they can think of. By the time QE2 came along, things were much more settled; they would have had more informed opinion about things. The records spoke for themselves. The growth momentum and employment growth slowed during the course of QE2. Not to say that QE2 created those problems, but certainly, it could not help in reversing them.
Of course, equity markets looked elevated for a while, but they reversed in August. So, when we look back at QE2, it's hard to see any meaningful sign of monetary stimulus increasing economic activities in the US. As far as QE3 is concerned, it's unlikely to be implemented in the near term. Clearly, due to the ongoing weak recovery in the US, there are a lot of concerns at the policy makers' level. From the recent Fed meeting what came out is that it's important to reduce the policy response extending the balance sheet with long-maturity debt. They sold shorter-dated bonds and bought longer-dated bonds, which we call QE2 and a half (QE2.5). It's extending the balance sheet with longer-duration bonds to keep the longer period interest rates lower. I would love to have stimulus. But the reality is that having put so much stimulus to work in the economy, they have just a few meaningful options left now.
Are we anywhere near a dollar crisis or a US crisis?
It's already happening, even after three years of crisis. One per cent US gross domestic product growth and nine per cent unemployment say it all. It's motivating for the government to open up fiscal taps and keep spending. But it works up to a point and, of course, that point is when the government's debt levels itself challenge its ability to maintain services to the economy and also repay debt. I do not think the US is at that point yet.
We saw a balance sheet impairment in the recent recession. In the US, this time around, the consumer's balance sheet is highly leveraged. The reality is it takes a couple of years to get them back to spending their incomes; rather, they will be repaying their debt. This is exactly what I am trying to say: we will continue to see weak growth in the US. And, the recovery from current problems could turn out to be a three- to five-year process. The monetary stimulus, like the one we saw last year and probably will get this year as well, will have no meaningful impact. The US is lucky it repaid some debt a decade or so ago, so the total stock of debt and cost is not yet at a level that gives us a concern that this is a unsustainable situation.
Is a bigger crisis unfolding?
There are so many dangers out there. You can point out the deterioration in fiscal accounts and unsustainable debt situation in euro zone countries. But that's not our core scenario. In our core scenario, we will call it a slow-motion crisis than a dramatic one. And after three to five years, we will see losses that could be close to or as large as in the Great Depression.
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What do these events, including a potential Greek default, mean for global equities?
There is clearly some uncertainty out there. Investors have already made adjustments and are less exposed to equity. It's not our core case scenario that the US and euro zone risk is actually coming or happening. We see rather slow growth outlook for the next two years. But there is a risk that recession will in fact happen, with a limited scope for fiscal and monetary stimulus. That will really be negative for equities. So, in that sense, a lot of negative news is already factored in equity markets and we do not think all of that bad news will pan out. I do not see a lot of downside risks from here.
What is your view on Indian equities?
Indian markets are quite prone to volatility. In fact, if you look at the volatility in global markets over the last couple of months, it is partly driven by the generous liquidity from central banks. In times of stress in global markets, we should expect Indian markets to be weak, as well. But if you buy the view that the global recession is actually averted and the global demand growth continues, then I think Indian equities are trading at quite attractive levels. But any kind of leverage would be a risky proposition.
What if there is risk of a double-dip recession?
No. I would say that level of pessimism is not priced in. If indeed you have that view, I would not advise an exposure to equities.
