Mumbai,December 12:Global markets rallied on the back of European Union (EU) Summit outcome. Nifty also reacted mildly positive to this news on Monday. Despite this relief rally, Devina Mehra of First Global doesn’t see the euro zone crisis getting solved .
“We are no where close to the end of the European problem,” she said in an interview to CNBC-TV18.
Continuing her bearish undertone, Mehra said that she doesn’t expect global equity markets to perform very well in the coming quarters.
Worst is not over for the Indian markets cautions Mehra and sees it underperforming ahead. “We might see Sensex falling to 13,000-14,000 range,” she added.
On the macro front as well, Mehra is not expecting any positive newsflow. She said that monetary tightening by the Reserve Bank of India (RBI) will hurt India’s growth and sees India’s FY12 growth rate slipping below 7%.
Unlike many experts, she doesn’t expect RBI to cut rates this quarter. “Even if they cut rates this quarter, I don’t see that having an immediate impact on growth,” she added.
Below is the edited transcript of Mehra’s interview with CNBC-TV18. Also watch the accompanying videos.
Q: It’s been a terrible year for the market. We lost 20% year to date. Do you think the worst is in the price?
A: Unfortunately, I do not think you have seen the worst getting over yet. One part of the problem is that the global equity markets are highly correlated. So one will see the global equity markets also not doing that well for the next coming quarters and probably for the whole year. One will see similar problems with the emerging markets (EM’s) and India. We think that India might still be among the underperforming markets rather than the outperforming ones even going forward.
Q: In absolute terms what kind of price downside are you talking about for India?
A: One might say that India’s GDP for instance even after a lot of downgrades would still grow faster than a lot of developed markets but unfortunately GDP kind of number doesn’t really predicate what happens to the equity markets. Equity markets are much more correlated globally and while we would like to think 20% down this year means that all the negatives are already in, unfortunately that doesn’t appear to be the case. I could see Sensex lets say going down to somewhere to 13000-14000 range not out of the range of possibilities at all.
Q: What is the global backdrop according to you? What did you make of the EU Summit and what that means for equities in the near term?
A: We don’t think that we have seen the worst of the European crisis behind us and as events have unfolded one after the other, the countries have gone into the crisis more. The real problem is with the whole structure of the euro and the EU because you have countries with very different fundamentals. This was the problem that we foresaw right at the time that the euro was first mooted that you have countries with very different fundamentals all cobbled together, now no longer having that many policy variables to play with.
So, they have countries with very different underlying having to live with the same currency, with the same monetary policy with only the fiscal part remaining in their hands. With the result that we find, there has been over emphasis on fiscal austerity for countries which didn’t need it but since that was the only tool available. It is like you have only a hammer and everything looks like a nail.
Italy for instance, a couple of decades ago went through a similar crisis but there they had the monetary policy tools to play with, they could inflate way out of debt trouble to some extent. They also had currency to which could be depreciated. Now all those things have gone away, so it makes things very difficult.
If one goes back to 2008, the beginning appeared like a minor crisis in terms of sub prime crisis in a few banks and that snowballed into something so huge globally. Here we are talking of large major economies going into trouble, so I don’t see that even after this euro summit where again they tried to cobble together some sort of consensus. I don’t see how that is going to solve the core problem and how that is going to solve the whole issue of more and more economies coming into trouble and how they can be bailed out.
Q: What according to you is the final endgame to this euro crisis?
A: There will be efforts but the only problem is that if one looks at the final end game whether this inherently unstable sort of collation can go on together. They have now about 27 countries and the fundamentals are so very different that it becomes more and more difficult to just push things through only trying to manage things through the fiscal route. So, that essentially will remain a problem. I don’t see this anywhere close to being the end of the European problem.
Q: Would you suggest that valuations have hit some kind of a trough level or you think the macro news will be restrictive for valuations to expand anytime soon from here?
A: We will still see lot of negative macro news, we heard Kaushik Basu saying IIP numbers are going to decline further. There was a revision of export numbers for the months that they did look good, now they are not looking so good and that’s one part where directly the eurozone crisis has had an impact.
We had serious problems on the deficits, both fiscal deficit as well as the current account deficit. As far as companies are concerned, again look at the last quarter which was before this big IIP slowdown really hit for most of the quarter, still the numbers were not very encouraging. So, valuations can start to look very different if you have one-two bad earnings quarters more.
Plus the currency has hit lot of company’s balance sheets in terms of whoever had foreign currency debt in any form on their books. It will take a lot of earnings to wash that out of the cash flows of the company. So I don’t see very good news even on Indian macro or Indian corporate side coming in. It’s not even as if one can make a compelling case that fine the rest of the world is going down but we have great news coming in. That is not the case.
In terms of policies again, we made a big mistake in terms of the monetary tightening that we went on and on with because ostensibly that was to target inflation. But inflation was not rising because of excess demand, it was rising because of either international commodity prices which the Indian monetary policy has little impact on or other supply constraints, on things like agricultural commodities.
So, this whole policy of just going on tightening just to show that something is being done for inflation, is where we made the mistake in terms of giving away growth which was so precious in today’s world. Growth is something where if one has momentum its easy to keep it going and once we let it go, it is very difficult to build it up again. if we have growth that’s when we can grow your way out of problems like the deficits etc. That’s where we made a mistake on top of all the other problems that are there in the world.