Shane Oliver, head investment strategy & chief economist, AMP Capital Investors, says India has a lot of uncertainty in the short term due to deterioration in the trade-off between growth and inflation, which reflects the lack of economic reforms.
He believes the Indian market valuation is higher compared to Asian peers, PEs and dividend yield are relatively low. "The Indian market needs to come down a bit more to become more attractive," Oliver said.
Speaking on Europe, he says the crisis is receding with the bailout of Cyprus. "However, bouts of volatility will hit the market whenever these problems arise," he added.
Below is the edited transcript of his interview to CNBC-TV18.
Q: Do you think the Eurozone will continue to reek quite a bit of volatility and nervousness on markets globally?
A: I think it probably will. The problem in Europe overnight was not the rescue for Cyprus, but the comments made by the Dutch finance minister who said that it was a template for the rest of Europe, which worried investors that their depositors may not be protected across the Europe. His statement has confused everyone.
I think the European officials should be very careful with their words, otherwise they can undo a lot of good work they do by putting these packages together. The crisis in Europe is receding. Cyprus problem is nowhere near the scale that other countries had seen over last three years. Bouts of volatility will hit the market whenever these problems arise. In a broader sense, one of the tides is out of the Eurozone.
Q: What would that amount to for equity markets? Many including in Asia and Europe have been in rough kind of patch. Do you think the worst is behind them or could there be a bit more by way of selling pressure before we get to a stable zone?
A: We may see bit more volatility in short term. The markets, led by the US share market had a very strong last year and the strength continues this year. Right now we are going through corrective or volatile patch working off some of the overbought conditions that arose due to strong markets gains. The US economy is now looking a lot healthier. Europe is still in recession but will again grow later this year.
The Chinese economy has stabilized with growth around 7.5-8 percent. Broadly saying, the global backdrop looks fine at a time when lot of monetary stimulus is pumped into the global economy. All this indicates that we might see more corrective activity in the short-term, but the broad trend in markets will remain up and the same will be the case in Asia as well.
Q: Would you buy the dip right now?
A: There is a case of buying on dips but I do not think the recent weakness can be seen as a sign of a new 20-30 percent slump in markets. The price-to-earnings multiples across the Asian region is pretty good. Economic growth backdrop will improve as the year progresses and a lot of money is sitting on the sideline. So, there is a case of buying on dips rather than getting panicked whenever these volatile patches arise.
Q: The problem for India as you pointed out is more weakness rather than less. The markets have been underperforming and the midcap universe has been bad in the first few months of this year. How are people approaching this market and is there still that degree of comfort or conviction in terms of putting money into India?
A: India still holds a degree of interest among investors, but there is lot of uncertainty in the short term as inflation rate still remains high, limited ability of the central bank to go for further rate cuts and slow growth rate has surprised on the downside. The trade-off between growth and inflation has deteriorated. Many investors think that this reflects the lack of economic reforms as seen from Indian government over the last few years. So consequently some of the shine has worn off India on the part of foreign investors.
Currently, the Indian market valuation is higher compared to Asian peers, PEs and dividend yield are relatively low but the earnings growth potential is still quite high. I think the Indian market needs to come down a bit more to become attractive
Q: What is your view on the runs in the currency market? The kind of weakness we have seen in the euro in the last couple of days, conversely the strength of the dollar index and its absolute unwillingness to breakdown beyond a point. How would you read that?
A: The currency markets have been very confusing for sometime. Six weeks back the European were roar that euro was too strong. There is more downward pressure on the euro due to uncertainty in Italy and issue of Cyprus.
At the same time we have seen relatively strong economic data from the US compared to some relatively soft economic data coming out of Europe. So the recent US dollar strength and euro weakness is not so surprising, I think that over the course of the year they will trade around each other. In next six-eight weeks, we will see it back the other way where the euro will look a bit stronger again.
I am not confident to take the bet on the Euro-US Dollar at the moment. On the other hand, the Japanese Yen is more interesting as it had a huge fall and is going through a bit of correction. There are indicators from Kuroda, governor, Bank of Japan, that more monetary stimulus will be on the way which will probably pull the yen at lot lower. I would bet on falling yen compared to the US Dollar-Euro rate.