There’s an asset bubble forming in Asian markets, according to Rob Morrison, chairman and chief executive of financial research firm CLSA Asia-Pacific Markets. The surfeit of liquidity powering markets in Asia (and India) will not dry up in the next six months or a year, but when the US overcomes its credit concerns, some of this money will surely go back, he said. “At some stage, the US market will be very, very cheap. This will result in investors pulling out money from the Asian market and putting it back in the US market,” Morrison told Mint in an exclusive interview.
On a day when the Bombay Stock Exchange’s benchmark Sensex gained 893.58 points —its largest ever gain in a single?day, on?the back of a rally in the Dow Jones Industrial Average on Tuesday in response to strong quarterly results from Wal-Mart Stores Inc. and an announcement from Goldman Sachs that it did not expect to take a write-down—Morrison may have come across sounding like a bear.
He is far from one. India, he said, would continue to remain one of the strongest bull markets (in the world) in the long run. Back in 2003, CLSA Asia- Pacific Markets had set a long-term target of 40,000 for the Sensex. “India is definitely more insulated to changes in the US economy than China and other Asian countries,” Morrison said. Edited excerpts:
Liquidity is driving up the Asian markets sharply. How long will this continue?
There is tremendous amount of liquidity in all Asian markets, including India. Very liquid markets tend to be very volatile. Liquidity is coming because institutional investors are trying to reduce their exposure to dollar assets. Also, money is coming from new parts like the Middle East and China, apart from traditional markets like US and Europe.
The result will be an asset bubble in Asian markets. I do not see the liquidity in Asian markets draining in the next six months or a year. But certainly when the worries are over in the US, some of this money will surely go back.
At some stage, the US market will be very, very cheap. This will result in investors pulling out money from the Asian market and putting it back in the US market.
Two recent interest rate cuts from the US Federal Reserve saw different reactions from global investors. While the 50 basis points cut in September resulted in large amount of money flowing into the Asian markets, the 25 basis points rate cut end-October was followed by a correction in the Asian markets. Why is this?
The Fed’s action in September was a liquidity booster. It was freebie for the market. On the other hand, the last (Fed) rate cut was seen in the light of a likely slowdown in the US economy.
The Fed is rescuing few banks, which were super happy making money out of extremely risky products.
Fresh Surge (Graphic)
Top 10 Gainers in Sensex (Graphic)
It seems there will be another 25 basis points cut this December and many more next year. This response is ridiculous. On the one hand, it is driving up liquidity in the US, further affecting its economy and, on the other, it is forcing other central banks to take similar steps to save their local currencies from a sharp rise.
CLSA is one of the largest issuers of participatory notes (PNs) in India. Are these PN holders now coming onshore in India, given that the FII registration process has become faster?
The process has become faster and many offshore investors are positive on registering onshore for a long-term investment in Indian securities. However, this process may take some time and could affect volumes in the short term.
The PN issue was under the regulator’s scrutiny for quite some time, but the Reserve Bank of India (RBI) triggered the move on PNs. All Asian central banks will have to take steps to rein in appreciation of local currencies vis-à-vis the dollar.
What are the risks in India and China? Is India better poised to face economic recession in the US?
There are political risks in both the countries. In India, there are issues such as corruption and some amount of inefficiency in terms of bureaucratic procedures. China is relatively free of such issues. However, the democratic institutions in India are very strong.
India is definitely more insulated to changes in the US economy than China and other Asian countries. This is one of the reasons why we are highly bullish on India.
How badly can a potential tax on carbon emissions affect the pricing power of the manufacturing sector in China and India?
Both China and India should aim for a balanced growth with more measures to protect the environment. There is always a cost of clean up.
A tax on carbon emissions is one of the likely outcomes in the global initiative to find an alternative to the Kyoto treaty. Any such tax will affect the end consumer (rather) than the manufacturer.