Asian equity likely to outperform global markets: Citi

In an Interview with ET NOW, Mohammed Apabhai, Head, Asia-Pacific Trading Strategies, Citi, discusses global markets. Excerpts:

ET Now: First, your view on the rally that Indian stocks have seen too much too soon or is it factoring in improving macros ahead?

Mohammed Apabhai: What is going on right now is not just India specific phenomena, it is actually going on right across the world. Basically what has happened was that markets were pricing in very close to near death phenomenon in September, October, November last year.

With the ECB policy action and the provision of liquidity from the central banks, what markets have realised is that there is a life in 2012, that the economic activity is not going to cease and what we are seeing now is a normalisation of market levels.
We are almost at the levels where markets have normalised and beyond this, will be the start of some sort of euphoric sort of buying, but we are not quite there yet. We still think that markets have got someway to go before they do normalise.

But liquidity is the key thing here and liquidity is being provided and any time it looks like liquidity is not enough that will comeback and it seems like they are just going to provide more.

ET Now: So around 5400 do you think the market will consolidate further, correct in the near term, and then take that lead to the euphoric activity that you just spoke about?

Mohammed Apabhai: Any consolidation that we get is going to be pretty limited. The point is that investors are still very underweight in equities. They are very underweight in risk in general, and that is going to continue.

If you look at money market, the amount that people still have in cash, is still at very high levels, people are still parked in bonds where the carries is actually negative, real rates are actually negative.

Over time, as they become more comfortable with the risk environment there is still more money that is going to transfer from the safety trades into the higher risk trades. And India as part of the emerging markets is a key beneficiary of that, as our old risky asset markets. For India in particular, it will be so heavily sold down that it has actually got more ways to go in terms of normalisation.

ET Now: So, do you feel that for India a new bull market has started, India was a sell on every uptick market for the year 2011, is now a buy-on-every-decline market?

Mohammed Apabhai: The market psychology is completely changed. In 2011, India faced problems with regard to inflation. The crisis that we had in the third quarter of 2011, the inflationary expectations got completely squeezed out of the markets.(pl chk) In fact, the RBI is now moving towards a stance that is far more dovish, far more accommodative and that is the environment which the equity market in particular loves. In addition, some of the funding problems for Indian banks will be relaxed and the RBI will provide them with additional liquidity.

With the industrial production numbers having fallen so sharply there is a limit as to how long the RBI will keep tightening policies in place. And it is not just in India that we are finding this but actually on a regional basis whether you are looking at China, Korea, Japan, Taiwan, it is pretty much the same sort of story that the tightening policies for 2011 have worked, inflation now seems to be under control under the current market environment. This will allow policy makers even if they can't reduce policy rates to at least keep them on hold for the time being. So, a major concern for Asian equity markets does seem to be out of the way.

ET Now: Post the passing of the austerity bill in the EU, how does the liquidity landscape look at in general. Will the surplus funds keep finding their way into emerging markets at least in the near term?

Mohammed Apabhai: My view is that yes they will. There are a few things that are going on. First of all, if you look at money market rates especially the dollar funding rates have come down quite a lot. They are almost on the way to normalisation, equity implied volatility is also normalising and a large part of this rally appears to have been triggered by the ECB LTRO which happened in December.

Now, what is very interesting is that the LTRO was about 489 billion euros which is almost the size of QE2 but the difference was that QE2 was spread over a eight month period whereas the LTRO programme for ECB was basically one of hit and what we are seeing is that all that money that is coming into the markets is basically driving this higher. Now, the estimates for LTRO II which is going to happen on February 29th is anywhere between 400 billion euros to up to 2 trillion euros.

Now the actual amount, I do not think is as significant, what is significant is that a) this money is going to be coming in b) the market still is very underweight for risk.

And before the end of the quarter what you could potentially get is very much a benchmark chase. Now the other possibility is regarding additional provision of liquidity which could come as early as today, we do have a Bank of Japan meeting and the Yen is very strong.

One thing that is interesting is when you get a very high number for the LTRO programmes from the ECB.Basically the Fed and the ECB both have done between two and two and a half trillion dollars of QE and the Bank of Japan is lagging far behind.

So whether they come out and do something or, whether there is some intervention in the currencies, finance minister has been talking about, there will be an additional provision of liquidity from the central banks.

ET Now: Oil rate tariff zone is sort of simmering again with geopolitical tensions as well and crude oil has already bounced back above the $118 to a barrel mark. How does the scenario look in that front and also, can a rise in crude cause a shock to India which is heavily dependent on imports?

Mohammed Apabhai: Yes, that is a very good question. It really depends on what your outlook is for geopolitical tension in that region. Obviously, it makes people feel very uncomfortable, it is a very volatile part of the world.

Everybody knows the crucial role that Iran plays in this. At the moment the market seems to be taking the view that there is is a lot of political posturing. Elections in Iran are coming up in the next couple of months. It could just be political posturing. The rally that we are seeing in oil does not seem to be over and above anything else that we are seeing in any of the other equity markets. Like oil is up 25% while the rest of the other markets it's up by 5%. The other thing is that the other OPEC members have guaranteed production.

So in terms of a disruption in terms of oil supplies, it does not seem that the market is particularly concerned about that as a near-term phenomenon but it is certainly something that we are continuing to watch to see if the pressures do rack it up and for India in particular, oil price sensitivity is a pretty significant factor.

I suppose the only redeeming feature has been that the Indian rupee has appreciated by so much that it has really taken the edge of the oil price rise in rupee terms. So far this year the oil prices has actually been on decline rather than on a rise.

ET Now: So at Citi for the year 2012 what is your big macro call--invest in assets which will benefit because of a dollar appreciation or because of a dollar decline, buy emerging markets or revisit emerging markets, what are your big calls?

Mohammed Apabhai: The thing is that we are probably two-thirds of the way through the rally right now, the best opportunities for buying in this market have already gone. There is still an element of fear out there, there is still the wall of worry that there are continous hurdles that we are climbing. Like the Greek vote over the weekend is out of the way. Always you see somebody else coming in and saying well okay that is out of the way now, there is another problem that we need to deal with meanwhile the markets continue to grind higher.

My view is that what is going to happen is--any consolidation in this region is going to be pretty shallow, probably about 2% to 3% and then we continue pushing higher, may be about 7% or 8% from where we are right now.

Now in that sort of scenario, all the other risky markets will continue following them to various degrees, driven by domestic liquidity concerns and what you will get towards the end this time is a huge amount of retail participation coming in at the end of the rally.

But, this is very different when compared to March 2009 where we saw a lot of retail participation right at the beginning of the rally, so this is going to be fairly different in its dynamics.

Now, there is potential for a very big burst of liquidity given what is going on to actually hit the Asian markets. So, we certainly think that on the trading flow side, the Asian equity markets are likely to outperform the global developed markets, particularly the US equity markets in the next couple of months.

The March quarter end will probably see a huge squeeze. Funds that are underweight will come to the markets and start buying and will use the strength in late April to start unwinding some risk into that.

We think that at that point, the value will all be gone and we need to wait for probably quite a pullback to get us interested again as well. We are moving away from the area where the central banks will be intervening. So for us, the trade at the moment is stay long, stay long Asia against the US, stay long into the end of March into the middle of April. And thereafter, start unwinding some risk into May, and go away, have a nice summer and then come back in September when markets are probably at a much better level to buy again.