US troubled, but gold will continue to shine: Experts
Published on Sat, Aug 06, 2011 at 15:15 | Source : CNBC-TV18
Updated at Sun, Aug 07, 2011 at 11:33
Like this story, share it with millions of investors on M3
ALSO READ |
The dominant theme of the week is the big meltdown across all asset classes as the global financial market came to terms with lower growth in all major economies. The Dow Jones crashed nearly 5% on Thursday, Asian stocks followed suit on Friday and crude and other commodities also lost.
In an exclusive interview with CNBC-TV18's Latha Venkatesh, Roger Yeoman, head of institutional equities at Avendus Capital and Brenton Saunders, director of Taurus Funds Management spoke about views on the issue and how they see these asset classes panning out.
Here is the edited transcript of the interview. Also watch the accompanying video.
Q: The US gross domestic product (GDP) data was bad but that came in quite a few days back. Investor sentiment seems to have declined more after the debt ceiling debate. Is there much disappointment that the US government won’t permit another fiscal stimulus and so there is really no hope from a recession? Is that what is driving markets down?
Yeoman: The key question is does the US political system have the will to make the changes necessary to put the US back on a sustainable footing given the general economic weakness, not just in the US but in the rest of the mature economic world as well. Compare what is happening and what has happened in rather unseeingly fashion over the last month in the US to what is going on in the UK, where, the conservative party has taken a very firm stance with regards to spending control and ultimate deficit reduction. We have two very different stories. The US clearly not making or taking the sort of positive political leadership that one would have expected from the leading economy in the world, it seems to me that the latest agreement is really just a short-term fudge to allow all parties to come out of it with some semblance of respectability. It is deeply unsatisfactory for the markets. That is why the markets are going down in such speed right now.
The problem is that the US economy isn't growing. If you have an economy growing fast, you can afford to carry a debt load which is much larger. But the US has too much debt, it's been ballooning out of control, the political leadership have not taken hard decisions that they need to take to bring things back under control in the light of slower economic growth. That is going to remain a concern for the market over here.
Q: In that case what do you think smart money will chase in terms of asset classes for the rest of 2011?
Yeoman: Right now it's safe-haven assets which will win the day. It's cash which is extremely unappetising in itself given low returns in fact negative inflation-adjusted return, the cash yields, safe haven such as high-quality real estate and equities where they represent of company cash flow which are resilient. That can mean consumer non-durable products for instance, it could mean the healthcare names, utilities anything which typically regarded safe is probably to be the best place to be short-term and the avoids are probably the ones that are leveraged towards the rate of economic growth.
Q: How do you see the non-precious commodities—the crudes and the coppers—panning out?
Yeoman: I think there is a very good chance that commodities will pause some time in the next six months. However, in the long-term, the outlook looks still very strong. And, to the extent the US and Europe hold together as world-leading economies (which they will) then demand is going to be strong from the US and Europe.
That is behind the sort of strategic investments we have seen notably from the Chinese of course in result-producing regions such as Africa. In the short-term if we continue to see the travails which the Europe and the US is suffering from and if we continue the sort of monetary restraint that we are seeing in India and China, then it is easy to believe that commodity prices will be driven down at some stage. I think that actually is a pre-requisite for interest rates beginning to come down in India for instance.
Q: How do you see commodities like metals and crude panning out? Do you see major downsides given the question marks over growth?
Saunders: I think any of these risk assets, whether they are crude or base metals or any other industrial-related commodities are really going to be at the mercy of general markets. The underlying fundamentals are good, we have lack of predictable supply; we have reasonable trend growth globally which should bode well. But if markets are inflecting in any way, crude is never immune to that, and is unlikely to come under pressure if that is the case. That is really not our base case; we think that markets will sort of muddle through the next couple of years and crude will continue to be sort of in this USD 100-120 per barrel range for the foreseeable future.
Q: Your take on gold, it’s been the best performing asset class. How do you see that panning out?
Saunders: We are very big proponents of gold, have been so for a long time. We really think what is going on the gold market is really just reflective of what is going on in a lot of developed markets and the monetary systems that back them—the transfer of debt out of the consumer environment into the sovereign environment and the inability to service that debt is going continue to weigh heavily on developed market currencies and be good for all real assets especially gold. We think gold stays strong from here and any short-term weakness in that we would really see as buying opportunities. Gold on any sort of risk-adjusted basis and in absolute terms continue to be the asset of choice globally.
Q: How do you see flows into emerging markets like India and China in the remaining part of 2011? Will flows into India have to wait for the interest rate cycle to peak out here?
Yeoman: Economic fundamentals in India state that the trade balances have rumbled along the negative 10 billion a month. Foreign direct investment (FDI) flows, if anything, have picked up year on year. The indirect investment flows, portfolio flows have been very lumpy. Generally speaking they have been on a negative trend over the last several months. This, given the rate hikes that we have seen in India, which is hardly a surprise despite the fact that the linkages between the economy of the size of India and Western economies are probably breaking down overtime. There are bound to be some sentiment effects. Looking at what is going on in the Europe and US, it is not a surprise the Indian market has performed as it has; it has been on a significant pressure recently; it is down double digits, year to date.
So it is hard to believe that India is going to perform well as a stock market until a time you can predict the interest rate cycle is starting to reverse and that is unlikely to happen, unless we see inflation coming down significantly from current levels.
No comments:
Post a Comment