Nicholas Ferres, investment director -global asset allocation, Eastspring Investments believes the recent correction seen in gold will benefit the Indian equity market and other emerging markets (EM) in the medium term.
"If the fall in energy prices and gold in particular continues, it actually could be quite bullish for India and the other EMs like Turkey because it faces similar current account issues and inflation issues as a result of importing a lot of energy and commodities," adds Ferres in an interview to CNBC-TV18.
The yellow metal is still at fairly elevated levels for the long-term. From a technical perspective, it could get long-term support at USD 1250-1270 per ounce.
Below is the edited transcript of Ferres’ interview to CNBC-TV18.
Q: The big concern for markets like India is whether or not there is some collateral damage coming because of this collapse in commodities and whether there is a big wave of risk aversion coming? Have you seen anything to suggest the same?
A: I have been looking at it for a while and what we are seeing is a correction by stealth. While the S&P 500 in the US has held up reasonably well, what we have seen is a correction in commodity markets and obviously commodities themselves. Last Friday, we saw the collapse in gold and silver and some of the precious metals and commodities more broadly. Perhaps deflationary impulse could be quite sinister for global equities generally.
Q: Do you expect more downside in gold even after the kind of damage that we have seen already?
A: Looking at it from a more technical perspective, it could get down to around USD 1250-1270 per ounce from a long-term support level.
From a more fundamental perspective, I was actually a little bit surprised that it did break support last Friday given the relatively weak macro news flow that we have seen in the US. From a psychological point of view, that is actually quite disturbing because gold ought to have probably held given that it probably means the Fed is going to delay any withdrawal of Quantitative Easing (QE).
The Fed is certainly not going to raise rates any time soon. So it is little bit of worry from that perspective. From a really long-term perspective, gold is still fairly elevated. However, for gold to really underperform in a material way, one probably needs to see a more robust US recovery and a normalisation in interest rates.
Q: Markets like India have started doing well with the collapse in gold and also the recent correction in crude. You think that optimism may not be justified? You think that the fall in commodities is preceding a bigger fall in emerging markets (EMs) equities per se?
A: If the fall in energy prices and gold in particular continue, it actually could be quite bullish for India and the other EMs like Turkey because it faces similar current account issues and inflation issues as a result of importing a lot of energy and commodities.
So, it could be quite bullish for both India and Turkey in the medium-term. The valuations are now starting to look interesting in both those markets and for India, it could be actually quite positive. However, like one sees global equities correct or global beta come off, in the near-term one may see some contagion effect. So, I wouldn’t rush in but I am closely watching India in terms of an entry level opportunity.
Q: So your view is that in the next few weeks there will be a synchronized global correction in equities?
A: I think it is already underway. The only thing that hasn’t corrected is the S&P 500 and some of the ASEAN markets have held up reasonably well. But if you look at EMs, they are actually down around five percent year-to-date and some EMs are down up to 10 percent. For example, Russia which is more a commodity market. So, we are seeing pretty significant falls already and Europe as a region as well is seeing reasonable correction.