In an exclusive interview with CNBC-TV18, Frank Shostak, Chief Strategist, MF Global Australia Ltd, speaks about the markets and gives his outlook going forward.He says there is a possibility of a big reasonable correction in India.
Here is a verbatim transcript of the exclusive interview with Frank Shostak on CNBC-TV18. Also watch the accompanying video.
Q: I was reading your report on how you see the trajectory of the US economy and the S&P. There are some who believe that the double-dip of the economy is ruled out, but they do not rule out a double-dip on the S&P. What are your own forecasts for the economy and more importantly for the stock index?
A: I hold a view that on account of the monetary policy in United States, predominantly money supply, the current rally we have in this so-called economy is because of the loose monetary policy we had so far. Now, we are starting to observe quite a deceleration in money growth and based on that I believe that the American economic activity from Q3 this year may slowdown quite significantly.
Q: How will that impact the stock markets you think, it peaks off before that? How much you think it can lose?
A: My view is that liquidity is already under pressure as far as financial market and stock market is concerned. It’s already coming off quite significantly. First of all, we are very close to the top as far as the current market is concerned and it won’t surprise me if the market will have a big correction, even 40% is quite possible down. Usually when market corrects they tend to overreact, on the down and on the up. So currently the market resist because people love to be bullish, but I think from liquidity perspective the risk factors are very high.
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Q: What is your sense on the commodity space? We have had a phenomenal rally from the lows. Do you think commodities are nearing their tops now and something like crude can go back to levels of between USD 60 and 70 per barrel or do you think the current ranges will hold looking at the global demand?
A: Based on the previous money supply rate of growth in America which was quite buoyant, it won’t surprise me that the oil prices may even climb back to around USD 90 per barrel, it is quite possible. Thereafter, probably we will have reasonable correction also.
Also, we should take into account the Chinese factor. China may have also quite a good correction, they are running quite a boom policies, lot of bubbles were created and now they are in the process of trying to burst those bubbles. Once they burst those bubbles, we will have some effect on various commodities.
So I would say the time lags vary, but I would say that the copper and various other commodities may start turning a bit softer by the year-end, some of them.
Gold, for instance, may start to come under pressure maybe earlier. But I don’t expect collapse in gold. It can come to around USD 1000 per ounce. But thereafter by year end we could have a reasonable upward move basically because once we have too many troubles and that’s really what I expect as a safe haven.
Q: If your theory is or if your belief is that both the risky assets at this point in time equities and commodities will tend to peak off by the latter half of 2010, where do you think smart money will go? What would be your recommendation as far as asset classes?
A: My view is that recession or correction is not about the end of the world. In fact that is what most people believe. In fact it is about different repositioning. I would say that smart money will probably leave the bubble activities, speculative stocks or most aggressive stocks and it will move towards the more of a wealth generating type of companies. It is very difficult to identify them, but those investors will place their money in assets or companies which are genuine wealth producers. They will be able to buy good value companies for reasonable prices. Thus, we will stick to bubble activities which seemingly doing well today, may end up holding paper. So I would say right now those smart people probably are repositioning themselves, but it is not about the end of the world, whatsoever, it is about good new situation.
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Q: What is your sense about the Indian economy? How will global investors look at emerging markets like India, do you think you will still look at this country as a slight bit of a risky bet or you think because these are the only high growth areas, the money could still come to emerging markets substantially?
A: The problem is once money tends to disappear people will be more cautious or will ask more questions about any economy for that matter. I believe that India probably offers a lot of opportunities in terms of its new emerging economy and a lot of growth prospects probably expected here.
Equally, I am a bit disturbed by the fact that the monetary policy in India was bit not too my likening. For instance money supply in India until the year-end was a growing, the way we measured the money supply it is around 23%, now this is unacceptable at least for me. Currently, the money supply rate of growth is decelerating to around 12%. So in India we are already starting to have some effect on the circle bubble activities.
Possibility for a big reasonable correction in India, yes, it is there. The liquidity as far as the stock market is concerned, is currently under pressure the way we see it. Even regardless of what happens in America, the Indian market maybe topping also.
Q: What would be your view, therefore, on the dollar since you are expecting a significant peaking off in the US as well, both economically as well as in the stock markets, what would be the trajectory of the dollar?
A: The American dollar, I like to look at it, not I dollar index, because I think it could be misleading, I like to pay attention to the let us say against specific currency, let us take euro. I think that the American dollar was little bit undervalued because we compare similar economies in some respect, but until very recently the Americans pace of printing dollars was little bit slower than the pace of printing euros. That is the main reason why I believe that the American dollar could little bit strengthens against the euro, regardless of various other problems that euro has got like the Greece problem
It was a strong session for the markets, with the Nifty holding fort at the 5,300 level. The Nifty ended the day at 5,304, up 34 points. The Sensex shut shop at 17,694, up 120 points. For the week, the Nifty and Sensex closed up around 1%.
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