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Mkts to trade sideways in near-term: Credit Suisse AM
Published on Fri, Jul 25, 2008 at 21:56 , Updated at Mon, Jul 28, 2008 at 09:54
Source : CNBC-TV18
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He expects crude to cool down to USD 100-120 range in August and September. "There is a low probability of prices slipping below USD 100 per barrel." Parker sees 7-7.5% annualized GDP growth in H2. "We have seen some cooling in the Indian economy." According to Parker, inflation would be at its worst during Q3 CY08. "We are likely to see improvement in inflationary expectations in Q4 CY08." He feels RBI may tighten interest rates once more. "It is premature to forecast an easing in interest rate policy. We are likely to see rate cuts only by early next year." Parker doesn't see a recession in US. "However, we may see mediocre growth numbers. We see 1% growth rate for US economy." He feels most bank write-downs with reference to the housing market may be over. "We may see some more write-downs in select banks." Excerpts from CNBC-TV18’s exclusive interview with Robert Parker: Q: Globally, are things worse off? A: Things are more positive. With respect to oil, we have come off from the peak of close to a USD 150 per barrel to where we are at the moment at about USD 126 per barrel. As we go into August and September, I see no reason to change my view that oil will settle down in a range of a USD 100 to USD 120 per barrel. So, that is positive. India as a consumer of commodities in contrast to markets like Brazil and Russia and is highly sensitive not just to the oil price but also to the whole range of commodities. If we go back to late June, the Commodity Research Bureau Index or the CRB index was trading as high as 480. That is now trading down at 410. In the weeks to come, we will see a test of 400. So, that sensitivity of the Indian market to commodities was a major worry 3-4 weeks ago. If we are right and this downward movement in commodity prices continues on trend for at least the next 3-6 months, that certainly puts a floor onto the market. Q: We have been pegged back quite a bit by the global cues. How are you feeling about the global equity setup right now because the Dow is not very far away from recent lows, financials keep breaking down again and again and the economic data is not looking particularly promising, at least the housing data is not. What is making you optimistic about the global equity setup then? A: During June, we were very negative on global equity markets worldwide. We felt that the US economy was going to weaken further. We were worried about the uptrend in commodity prices. We now think that uptrend in commodity prices has been broken at least taking a three-month time horizon. About the US economy and the housing market there, it is going to be a long time before we see a firm base being formed in the US housing market in the second half of 2009. The US housing market continues to have a negative effect as it has done for the last two years on US GDP. The US economy is not going into outright recession. But we do think that you are going to see mediocre growth numbers in the second half of this year. One has to emphasise that this ongoing divergence between growth and corporate earnings in emerging markets is in contrast to very weak or mediocre numbers, although not outright recession in developed markets such as the US and Europe. For the second half of this year, a central case forecast for US growth would be 1% with no outright recovery in the housing market. The good news however on the housing market is that banks have written off close to USD 420 billion over the last year. So, most of the bank write-downs, particularly with respect to the housing market, are behind us. What we are seeing in the US housing market and the US banking market is obviously peak divergence between different organisations. So, if we look back over the last couple of weeks, we have actually had good numbers out of US banks, such as JPMorgan, Wells Fargo and Bank of America. What upset the markets yesterday and would result in a moderate downward move in the US market today is obviously the increased provision by Washington Mutual, which has a large exposure to the mortgage market and which clearly has more write-downs to make.
Q: What would you expect the larger players to do because India is a market which has been starved of global capital flows for the last six-seven months. Do you still sense a lot of extreme risk aversion towards emerging market equities? A: Over the next month at least you are going to see a decline in day-to-day volatility. My central case at least over the next one month is actually that the Indian market is going to trade sideways before we get a better market from August onwards. Coming to your question on global capital flows, the trend over the last six months has been exceptionally clear. Foreign investors have been withdrawing from market such as India, and China. They have been recycling capital into commodity-linked markets particularly Brazil, Russia, and to some extent the West Asian markets. The last two-three weeks has seen profit taking and a clear exit of foreign capital from commodity-linked markets. There is evidence that foreign capital is starting to move back into the Indian market, at a time when domestic investors in India are also running high levels of cash. That’s one of the reasons why the Indian market is underpinned at the moment given this analysis of foreign capital. Like India, global investors have very high cash positions at the moment. Given the valuations of Indian market relative to where it was at the beginning of this year, suddenly India has gone from expensive to being reasonably priced again. That would underpin the market.
Q: What are you expectations from an interest rate point of view? Do you expect a large number of markets like India to tighten or raise interest rates further because that is a big headwind which we are dealing with in our equity markets here? A: What we have seen over the last couple of months is some cooling in the Indian economy. The GDP growth on an annualised basis in the second half of this year in India can be between 7-7.5%. So, the overheating that was worrying many foreign investors at the beginning of this year is less of an important factor now. Now, we are seeing the worst period for inflation. If food prices start to decelerate as we go into year-end and early next, and oil prices continue on a downward trajectory, we could see RBI perhaps have one final tightening in interest rates during Q3. It’s probably premature to forecast an easing in interest rate policy. The probability of interest rates being cut over the next three months is close to zero. Any pace of interest rate increases is certainly going to be minor. The same can be said about America and Europe. I do not see the interest rate environment being threatening to global equity markets, although inflation numbers for the next few months are going to be bad. We are going to see an improvement in inflationary expectations in Q4 and that is a positive factor for global equity markets and Indian markets in particular.
Q: Do you think crude is going to form a base around USD 120 per barrel and fly back to USD 150 per barrel or is this the real cooling down? Over the next six months we are going to a see sharp increase in agricultural production, and alternative energies. Companies, which benefit from an increases in production of such products like equipments and fertilisers, will do very well. |
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