'I don't believe we have seen the bottom yet'
World over, the markets have fallen visibly in the last few weeks due to concerns over the euro crisis, China’s move to tighten liquidity and, more recently, the standoff between North and South Korea. In an interview with Jitendra Kumar Gupta, Standard Chartered Bank’s Group Head of Financial Markets, Lenny Feder, shares his views on these concerns and the outlook for global and Indian markets. Edited excerpts:
Is the correction in the Indian markets justified?
This crisis has demonstrated that business models that don’t make fundamental sense will fail. India is better positioned than most countries, given the drivers of economic growth and prudent regulation by policy makers. Also, given the turmoil, there has been some sell-off in Indian equity. But, not nearly as sharply as in China. This is a reflection of the more domestic nature of India’s economy and lack of property-led bubbles here.
While fiscal deficit is an issue for India, too, a revival in growth (implying higher revenues for the government) and a credible fiscal consolidation plan laid out in the Budget by the finance minister have helped India win international confidence. Of course, that does not mean India is immune from the situation in Europe. Some adverse impact on growth might be inevitable if the euro crisis deepens further — Europe remains one of the most important export destinations for India with 22 per cent of Indian exports going to Europe. The crisis will also impact the overall confidence. Having said that, the strong domestic demand should help India Inc and the economy chug along.
How is liquidity flowing across asset classes and markets?
The Greece situation has caused many institutional investors to pause, and they are taking a more guarded approach to investing right now. We’ve seen credit spreads widen and stock markets continue to slide. I don’t believe we have seen the bottom yet.
What is your assessment of the euro crisis?
The euro zone, obviously, faces tough choices. I don’t believe the euro crisis is over. The $1-trillion dollar package was needed as the original $100-billion package was too small. There are still plenty of questions. For example, can southern Europe fulfill its austerity commitments? (Since part of the trillion dollars comes from Spain, Italy and Portugal...) Can these countries really afford this right now?
Is the Greek crisis bigger than it appears?
The jury is still out. While I believe there is still more pain to come, we won’t fall into an abyss. That all said, as with the Lehman crisis, the global community does not want Greece to fall into the abyss. We will pull together and contain this.
There are people who say the days of 2008 will be back again. What is your view?
I think it is two-fold. On the one hand, the market is getting close to being as jittery as it was in 2008. Take a look at the volatility in the market currently — it is spiking as aggressively as it did 18 months ago. On the other hand, keeping rates near zero will drive economic growth. The US is on its way to recovering. And, for the developing world, it was never in nearly as bad a shape as the developed world to begin with.
Are global investors now really becoming risk-averse? Will liquidity flow out of emerging markets like India?
Yes, we are seeing greater risk aversion. The emerging markets are almost too stable for some investors. It used to be that investors seeking yield would invest in the emerging market. But, they can now just invest in southern Europe.
That said, investors who are following fundamentals recognise India as the future and are investing here. We can expect continued foreign investment.
Where are commodities prices headed, including crude oil?
I believe we could possibly see a little more technical weakness into June before a sustainable and gradual rise, lasting for many months. The biggest thing impacting the markets right now is that old familiar nemesis: Fear, uncertainty and doubt.
For oil, the demand from the East is increasing. Last month, China imported five million barrels a day of oil, which is a solid number. Oil production from mature oil wells in North Sea, Mexico and several other non-OPEC countries is decreasing. New finds, like those off Brazil, have high operating costs and low crude oil prices will just stop such projects. Even the Canadian oil sands projects require crude oil to be above $60. So, the long-term picture is bullish and I will not be surprised to see triple-digit oil prices, probably by 2011 or 2012.
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