Baker indicated that 2012 will be a difficult year for markets in terms of growth. He believes that high inflation is a cause of concern for emerging markets.
Q: How executable is the European financial stability facility (EFSF) plan?
A: The EFSF mark is still not fully functional. There is a widespread belief in markets that more needs to be done in terms of up scaling the size of it. We are in a bit of catch-22 where the market is running ahead on expectations and the reality of what politicians can deliver is lagging behind.
Q: On the subject of recapitalising banks, how likely it is that it may happen? What kind of impact would it have on equity markets?
A: Two things are responsible for the recent 10%-rally. The US growth expectations have stabilised. There have signs of movement in a collective world coming from Europe.
By the time we get to the announcements, whether it’s meeting of the European Union and euro zone on October 23 or G20 meeting on November 3-4, there has to be a real surprise package in terms of the scope, scale and coordination of it.
Otherwise, the rally would be probably enough. There is chance that there would be a recapitalisation of banks, which is a more fundamental solution to Greece’s problem. If that is achieved, then there probably is some more leg in the rally.
Q: How high is the risk of some kind of contagion effect on the larger European economies like Spain, Portugal?
A: It’s high already. Even if things are agreed on October 23, the impact in the wider European economies is already felt in terms of negative drag. Having peaked or seen some improvement in August data over the past few days, we will reverse trends in September and October.
Q: What is your prognosis for 2012? Once this whole immediate European issue is closed out, how do you see general macro conditions in Europe and America next year?
A: It will be a difficult year as far as growth is concerned. One has to still believe that it is the primary driver of where prices ultimately go. There are a lot of earnings optimism baked into 2012 estimates that need to come down.
Fundamental attractiveness of equities on a longer term basis is the strongest argument for equities. The growth backdrop will still not be a compelling one. We would expect positive returns at this point, but nothing particular stellar.
Q: How important would be currencies in mapping? The dollar has retraced quite a bit in the last few days?
A: There are lots of factors that are supporting the dollar. The portfolio of flows clearly worries about euro.
The measures with Swiss Franc have been taken to make the currency look less attractive and similar is the case in Japan. In the world of currencies, it is always what looks least poor at that particular point.
At this stage when the dollar is still got some potential support, but it’s linked again to the euro situation. If there is more convincing coming out, then euro could start to reverse some of those recent loses.
Q: What do you think about the emerging markets space? What do you expect from those markets?
A: For a large part of this year, there was a growing conviction that the emerging markets might have totally decouple from what is happening in the US and Europe. We are likely to see more of recoupling than decoupling as far as economic prospects are concerned. The concern for emerging markets remains the monetary cycle.
There is clearly still a core inflation issue in many-many countries in emerging markets, which is not clear that the policy actions so far is taking care of it. Given very lax monetary conditions in US and elsewhere, it is finding its way into the emerging markets, which is still an inflationary issue. source www.moneycontrol.com For the latest updates PRESS CTR + D or visit Stock Market news Today
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