Nick Parsons of National Australia Bank tells CNBC-TV18 that the positive cheer that the market started the year with might not last too long. He says that the improving economy in Germany is grabbing all attention right now, but once the focus shifts to the countries that are not performing as well, markets may lose some sheen off the New Year rally.
On what could affect inflows into India, Parsons points tot he fact that investor sentiment was positive as long as the rupee stayed below Rs 54 against the dollar. Once it rose above that, interest slackened. "So watch the currency space since investing in EMs also means buying the currencies," he says.
Below is the edited transcript of the interview. Also watch the accompanying video.
Q: Just peer into your crystal ball and tell us what kind of an outlook you expect global markets to have for 2012?
A: I think the first point to make is that the early moves in January are rarely directional for the year as a whole. As much as we understand, we want to begin a new year full of hope and optimism, and there is a natural tendency to seize on good news.
I think it’s worth just injecting a note of caution saying that yes, we did start the year positively, we have had good news out of China, and the hope is that the Purchasing Managers' Index (PMI) surveys in Europe and UK and the United States this week will maintain that good news. Nonetheless, we can get a good figure from the US payrolls on Friday and then I think we are going to have a little bit of a reality check at the end of the week. So enjoy this while it lasts. I don’t think it’s giving us a big signal for the rest of the year as a whole.
Q: Today we saw a 2.5% rally on frontline indices after the stark underperformance India has seen. Do you think emerging markets could attract some capital?
A: I don’t think there is a great deal of investor appetite for EM at the moment. It’s certainly not something that we detect. You are absolutely right to point out to the very strong performance-Sensex is up 2.5% across the rest of Asia, we have got gains ranging from 0.5% to nearly 3%, but we saw those similar gains in the German index - the main index that was open yesterday. We didn’t have a late rally in the United States, the UK was out, and today, we have got a kind of a catch-up process. The point I am really making here is that the only news we have had and the only lead we have had has been from the strongest markets in Europe which is Germany.
Now, it’s all very well focusing on Germany and because the German economy is doing well, but when market attention switches to the ones that are doing less well, I fear it may just take some of the shine off this early new year rally.
Q: So what do you watch out for in the near-term, any significant event that you feel could be a market mover?
A: Firstly, what we really need is some sign of currency stability. The Indian rupee has had a difficult year not only in currency adjustment terms, but also weighed down on performance, which suggests that as long as dollar-rupee can maintain a level below Rs 54, you may find a little bit of investor interest coming on the basis of bottom fishing. But if we were to get the currency back above Rs 54 and we were to see other currencies in the region coming under pressure, then I think it would be very unlikely that this strong performance in equity markets in the very beginning of the year could be sustained.
So what I would say is watch the regional currencies for the true state of international investor appetite because if international investor is going to buy in EM, they have to buy the currencies as well. So watch the rupee very closely.
Q: Would you extend that caution to the Euro as well because it hasn’t gotten off to a good start in 2012?
A: I would extend that caution. Today, we have been very briefly above the 1.30 level. The high that we are seeing in trading over the last 12 hours has been 1.3008 and that’s the first time in five sessions that we have actually been above 1.30. It’s unlikely I think that we are going to be able to sustain those kind of levels, and when the market begins to focus on the auction calendar that we have got coming up and the European bonds which mature and them going to be replaced with fresh money coming into the market, then that’s when we can say that 2012 is really under way from an investment perspective. I just cautioned about being too optimistic on these early signs in a relatively illiquid New Year market.
Q: A final word on the 9th January meeting between Nicolas Sarkozy and Angela Merkel. We have seen so many of them happen in the past, but what are you expecting this time, anything concrete out of it?
A: I think the interesting point about the meeting is it’s bilateral. There are only two people at this meeting and those are the two who are most determined to try to keep the Euro intact. So I think that is going to be a small positive potentially on the horizon.
The experience of the EU meeting over the last six months has been that it’s only going to get to the group of 17 Eurozone members that the troubles and fragmentation and the splits really begin to occur. I think there is scope for positive outcome, but we need to see that positive outcome translated into positive actions and those actions also agreed by all 17. I think that is going to be a trickiest stumbling point that the focus of attention after next Monday’s meeting will be the ECB council meeting for the first month for 2012, which is on Thursday, 12th January.
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