Roubini: Emerging Markets Ripe; US Equities Stretched

October 07, 2014

Nouriel Roubini is one of the world's most respected macroeconomists. The NYU professor and chairman of Roubini Global Economics made his name by accurately predicting the collapse of the U.S. housing market, but it is his unparalleled insights into countries around the globe that make him a regular at the World Economic Forum in Davos and No. 4 on Foreign Policy's list of the "Top 100 Global Thinkers." Roubini also co-authored "Crisis Economics," which sheds light on the causes of the financial crisis of 2008 and provides a road map for sustainable growth for the future.

Roubini recently sat down with to discuss the road ahead for ECB policy and what it means for European equities, as well as what a China slowdown means for the Aussie dollar and other commodity currencies. Roubini wraps up with his outlook and top picks for 2015. At the latest ECB meeting, they announced the start of the Asset-Backed Security Purchase program, as expected. When we spoke in June, you expected them to go beyond ABS and also buy sovereign bonds. Do you expect any further action from the ECB before the end of the year?
Nouriel Roubini: First of all, what the ECB has done is already quantitative easing. There are multiple definitions of quantitative easing. One is the strict definition that says QE is buying sovereign bonds. But the economic definition is when you increase your balance sheet on the assets side by buying securities.

And whether you buy sovereign assets or private assets, you're increasing the balance sheet, right? So the ECB is already doing QE, even if they don't call it QE and instead call it credit easing.

Then there's a question of when down the line the ECB will run out of ABS to buy, because their current supply of senior ABS and of corporate bonds is too small to be able to ramp up the balance sheet by the factor they need.

So, for the next few months, they're going to buy what they can until they run out. Then they'll have to buy sovereign assets. Could this happen as early as December? It's a possibility. So it's not a matter of whether they're going to buy sovereign bonds, it's only a matter of when. It could be as early as December or it could be sometime next year—I would say, by the spring. In our previous conversation, you were bullish on European equities. Since that conversation, European equities and growth estimates have taken a hit. Do you see the ECB's latest moves as sufficient to turn things around?
Roubini: Well, there are two forces that are driving European equities. This year, the first half of the year was dominated by disappointments about eurozone growth and inflation. And as we pointed out, the ECB would go first to conventional easing zero policy rates, and then negative positive rates. And once they were running out of conventional tools, they turn to the unconventional.

Both the conventional and unconventional easing should lead to a rally of European equities, but the growth story, so far, has dominated this year. But I would say that, between the weakening of the euro, the substantial easing of financial conditions—with long rates lower, and the spreads for the periphery falling—once these financial measures and portfolio impacts impose the effects of restoring growth, restoring inflation and restoring competitiveness, European equities will start to go higher. And the impact response to the ECB government council meeting in September was initially positive also for European equities.

So I would remain of the view that, if you compare what the ECB is going to do to what Abenomics has done to weaken the yen and rally Japanese equities, well, we expect the weakening of the euro is going to continue as expected through the end of the year. At the beginning of the year, we expected the euro would fall from $1.40 to below $1.30 and now effective yields to fall across the eurozone and spreads to tighten. We have not yet made the call on European equities to start going in the right direction. But I would say it's a matter of time. Roubini Global Economics recently predicted the Aussie dollar will plunge 20 percent from current levels. Would you share your thoughts here?
Roubini: Well, the view is a combination of a view on China and a view on Australia. The Chinese view is that China, whether you like it or not, is going to slow down in its growth rate: This year, barely 7 percent growth, and next year 6.5 percent growth and, by the end of 2016, growth will be under 6 percent. So the growth rate is going to go down and China will be less resource-oriented as they move away from fixed-investment and resource-oriented growth towards labor-intensive and consumption-oriented growth.

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