Western Europe is good, China is bad market

Kiran Ganesh, lead portfolio strategist of the Swiss investment bank, the UBS, anticipates a positive outcome of the Greek situation. In the interview he gave to Alapblog, he said he was certain about that before 30th June, there was going to be a global agreement between IMF and Greece. However if there would not be one, there is still no need to worry about any infection, since ECB would intervene in order to protect the government bonds of more fragile countries, such as Italy or Spain. If there we a panic in the market anyway, strategists at UBS expect a quick 10 percent drop on the leading stocks.
Consultants of the Swiss banking giant suggest investing in Western European shares, because – they say – western economies are booming: consuming is increasing, unemployment rates are low. However, the share and property bubbles will cause a significant damage in China, so it is advised to stay away from it. Furthermore, Kiran Ganesh expects the further strengthening of USD against the euro and yen: he believes that by the end of the year, one euro will have been worth 1.05 dollars only.

Péter Zentai: How do you prepare yourself and UBS customers for the outcome of the Greek drama?
Kiran Ganesh: We think that an IMF-Greece agreement is far more likely than Greece leaving the euro-zone. If I had to make a bet, I would say they will make and agreement before 30rth June. Though, it is also possible that things get out of control of the Greek government and foreign creditors, and there will be an unstoppable capital flight from Greece.
In this case, these events will lead to Grexit (the possibility of Greece leaving the euro-zone).
We offer three scenarios to our concerned customers.
The first and the most likely is Greece staying in the euro-zone. To those who think this way, we suggest and act accordingly: it is a good time to get involved with the stock markets of euro-zone countries. We think currently it is a good opportunity for buying.
The second scenario is that Greece leaves the euro-zone, but ECB will put out a statement and make clear that they would protect the euro-zone at any cost. The market will conclude from it – and it is likely to happen if Greece leaves – that the Central Bank will start taking aggressive measures and decrease Spanish and Italian bond yields, in other words, it will start purchase them. By doing so, it prevents any uncertainty and fear to arise that Italy and Spain would follow the Greek example.
The third scenario is the least probable: Greece leaves, and the ECB does nothing; so Draghi (president of ECB) does not put out a statement ensuring that they would do anything to protect the euro.

What would happen to the markets in such a case?
Share prices would drop relatively quickly by an average 10 percent; Italian, Spanish and Portuguese bonds would produce 3-4 percent increase of yield. There would be panic reactions; however, they would not last too long. In both second and third scenarios, we would still keep purchasing European shares, rather than selling them.

All of our analyses and knowledge support that Europe will recover, and a significant growth will start. Its evident sign is the increasing level of consumption among the people of Western countries. Trade is blooming in Europe! Furthermore, in every country in the zone and the West in general, unemployment is on the decrease.
This positive development was influenced by ECB’s bond-buying and commercial bank supporting programmes, what we know as QE. Soon, every obstacle will be removed, so commercial banks can promote lending for every economic sector.

How do you explain the still decreasing interest in European shares? There were numerous stock market falls in the last weeks…
The main reason is the uncertainty around Greece, but the sudden yield increase of government securities of Germany and other leading countries also worries investors. Many people are concerned about – rightfully – that they would lose a lot on (treasury) bond portfolios; they see profit in stocks, so they sell the latter to compensate. However, we deem the current situation to be positive rather than negative – in terms of the market.

What is positive in the burst of both European and American treasury-bond markets?
There are positive economic growth expectations behind the yield increase. Investors believe the numbers indicating the stimulation of retail and consumption, and the increase of wages. They assume that the danger of deflation is over, and prices will start to go up.
So far, only stock markets and real estate show significant increase in prices…
Indeed, it does not show in consumer prices, and it will not for a while. Though, we can see the beginning of inflation spirals in many investment assets. However, at the same time, we warn our clients not to convince themselves: ‘there is a bubble growing in the stock, and property market’. That is not the case in Europe yet – according to our conviction. We – as I said before – keep and increase our European equity exposure.

What do you buy?
Bank securities, and equities of those companies, which innovatively take part in stimulating retail, and wholesale consumption.

Haven’t the stock markets of China inflated too much?
They have, indeed!  There we can talk about a growing bubble. We are very careful with China, when it comes to portfolio development, and we do not suggest entering the Chinese market either. As a foreshadowing, in the overheated Chinese property market, a slow price reduction has already started, that can turn to extremely fast at any time…

Do you think it will transmit to Europe and America?
More likely that it will not. Chinese assets have become overpriced ‘by a feedback-loop’, because hundreds of millions of people couldn’t do anything with their savings. A lot will be lost there. All that Europe and America will feel from this, is that millions of Chinese will buy less imported goods, they will travel abroad less, and they will allow less luxury to themselves. Some branches which are dependent on Chinese export, such as car manufacturers, will make losses. However, the burst of the Chinese bubble will not necessarily turn into a global problem.
If there were a great stock market crash in China, that would be a different question. In such a case, the Chinese economy slowed down significantly, that would affect the global stock, and money markets. We point out to our clients the Chinese problem, along the Greek one as a major source of risk.

Isn’t the steady zero interest rate environment dangerous for Europe and America?
I think great central banks have managed this issue efficiently. The market seems to ensure starting the interest rate increase cycle on the part of central banks.

When does it start?
According to all of our data, the interest rate increase cycle will begin in America in September. However, we do not expect the rises to be significant, but slow and predictable.

What can you tell your clients about developing markets, such as Middle-Europe, or Hungary?
We are strongly selective in these countries. India, Taiwan, Asian countries in general are what we consider to be developing markets in terms of investments. We are focusing on them. Some Middle-European countries are interesting, but we remain neutral, we do not increase our Middle-European exposures.

Why not?
First of all, they are small markets. Second of all, politics and the government play too big role in their markets. We realized, and this is what we advise to our client too, that it is better to stay away from such countries, where corporations and the market are interwoven with politics, where the government can easily interfere in different market operations, where the political environment is not stable for foreign investors.
This is quite characteristic of Russia, where the market is set back by other, geopolitical concerns too. We stay away from Russia, because it’s unpredictable and risky.

What about Switzerland? What lesson did you learn from that the Swiss central bank ‘let the franc go’?
The lesson is to never absolutely believe the central bank communications. It seems that central banks prefer to say things that investors want to hear, but sometimes they do the exact opposite. Didn’t matter that the (Swiss) National Bank had promised that the franc would stay pegged to the euro, still, from one day to another, the franc was unpegged from the euro. However, the Swiss economy doesn’t suffer as terribly from it, as we expected. The data of the first quarter indicates a drop in export; however, the living standard of the locals hasn’t changed. Consumption is increasing, prices are stable.

What are you expecting from the other great currencies, and development of their relations?
The dollar will get stronger against the euro and the yen, because the interest rate rise will happen sooner in the United States, than anywhere else. Furthermore, because Europe still has to maintain the quantitative easing period, and the ECB might have to buy T-bonds of other Western European countries.
We think that this year, the current dollar-against-euro will decrease from 12 to 1.05. As for Japan, we expect 124 yen against one dollar.


Original date of Hungarian publication: 19 June 2015