May 14, 2013 11:39 PM IST | Source: CNBC-TV18

India maybe up 10% between now and year-end: Robert Parker

Robert Parker of Credit Suisse AMC does not see any significant move in commodity prices to derail the equity market. In fact stable commodity prices will be positive for India, he adds.

Robert Parker of Credit Suisse AMC does not expect significant correction in global indices.

He says the Fed will be cautious in terms of pulling out stimulus so as not to derail the still fragile economic recovery. "There is clear message from the Fed that third phase of quantitative easing (QE3) is on track at least for the rest of the 2013 and will start to trim it in Q4 as the economy starts to build up speed," he told CNBCTV18.

He expects QE to stop in Q2 of 2014 but in a gradual manner.

However, he does not see a major correction for the US market but expects Europe to catch up on the outperformance. "There is a case for some profit taking in the US, in the next month or two and for funds switching back into the under performing Europe."

On the emerging market front, he says, the BRICS (Brazil, Russia, India, China, South Africa) have been under performing the non-BRICS. Markets like Indonesia, Philippines, and Thailand have shown stronger performance over BRICS’ markets.

However, he feels that market like Mexico, Philippines have started looking over bought and one could see investor rotation into the under performed markets like India and China. So backed by his thesis of investor rotation, he says, “It is entirely possible that we could see the Indian market between now and year end up a good 10 percent after this very difficult market environment that we have seen so far this year.”

Globally, he says defensive stocks have significantly outperformed cyclical stocks and so, in the next few weeks and certainly in the next month, it is time to rotate out of overpriced defensives into undervalued cyclicals.

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Most of the indices are still sitting at record highs or atleast at a multi-year high. What’s the mood like, and are you expecting any kind of a significant correction in the global indices?

A: I am not expecting a significant correction. We have got a very interesting market pattern in recent months and there are a number of themes which are worth highlighting.

The first theme is that globally defensive stocks have significantly outperformed cyclical stocks and that reflects still some investor conservatism - shows that investors are not over invested in global equity markets.

The second theme has obviously been the underperformance of Europe versus US year-to-date; we have got the S&P up close to 15 percent whereas the euro stocks only up just over five percent.

The third theme obviously is the major outperformance of Japan, which has been the big driver in markets.

In emerging markets, it is somewhat different story because we have the Brazil, Russia, India, China, South Africa (BRICS) underperforming the non-BRICS. So if one just looks at Asia, still there is very strong performance by a number of the South East Asian markets like Indonesia, Philippines and Thailand.

But if one looks at the BRICS, Brazil for example is one of the weakest markets so far this year, down close to 10 percent.

So, one cannot just say investor sentiment is positive or negative. I think they are quite complex, sub-components to that question.

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Q: Let’s start with the first one that you spoke about, the US markets. Economic data now has started coming in positive since the jobs data and yesterday’s retail sales data. Would you say the markets are pricing the growth correctly or as some people believe that they have run way ahead of even improving fundamentals? Basically, should you fear that the Fed might stop or even trim its bond buying programme?

A: We have got a very clear message from the Fed, which is that quantitative easing (QE) QE3 is on track atleast for the rest of the Q2 and the Q3. My own view is that USD 85 billion of QE per month, they will start to trim that in the Q4 as the economy starts to build up speed again and as we gets growth moving back towards about two and half percent in the second half of the year.

I do think that QE probably will stop in the Q2 of the 2014 but it is going to be a slow process. The Fed is very sensitive to pulling back on monetary policy, which may derail what is still a somewhat fragile economic recovery.

In terms of whether the market is correctly pricing or not, I would argue probably the market is correctly pricing.

If we looked at the price-earnings (PE) on the States, at around 14 at the moment that is still below the historic average and it is entirely possible that we will see further PE multiple expansion over the balance of this year.

I am not looking for a major correction on the States but what I am looking for is, for Europe to catch-up the outperformance of the States and I do think there is a case for doing some profit taking over the next month or two in the US and switching funds back into for what is underperforming Europe.

Q: Do you see a case for emerging markets as well, something like an India, Hong Kong etc. which as well have underperformed the rest of the developed markets also playing catch-up?

A: The answer to that is absolutely yes. I think in emerging markets there are two themes.

The first is that some of the markets which have done very well like Mexico and the Philippines, valuations are looking somewhat stretched now. I am still very positive on the economic outlook for those two economies but markets are looking overbought.
Where I do think you are going to see investor rotation is into the markets, which have underperformed – obviously in Asia, the ones would stand out are India and China. In case of India we obviously have one very supportive factor, which has been the easing of the monetary policy on the fact that interest rates in real terms are negative and that will drive domestic investment out of the bond markets into the domestic equity markets.

I do think over the next two-three months and the fact that the Shanghai Composite year-to-date is down 2.3 percent, the Sensex 30, is only up 1.7 percent – those markets are now looking undervalued relative to other emerging markets. I do think we will see investor cash move into emerging markets in totality and particularly into those undervalued underperforming markets.

Q: What would your stand be on commodities in that case if you are going to see the US continuing to do well and perhaps do better with the two and half percent gross domestic product (GDP)? Are commodities kind of at the last part of their bottoming, further falls shouldn’t be expected?

A: We can see very little price movement. Commodities have been a very frustrating place to invest so far, this year. For example if we look at the energy sector, Brent year-to-date down seven percent. The only really strongly performing commodities this year would be Nymex Natural Gas and very limited soft commodities for example cotton prices are up very sharply.

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Generally, if one looks at key commodities like oil and copper, they are going to drift sideways to marginally up. For example, for Brent current trading about USD 103 per barrel, as we go into the Q3, we may see a price in a range of USD 105-110 per barrel, likewise we could see copper back into a range of USD 7,500-8,000 per tonne, but that’s a very marginal move.

So, I don’t expect any significant move in commodities to derail the equity market rally and if we see stable commodity prices – that’s very positive for India as a commodity consumer.


Q: What kind of gains would you therefore expect in the Indian markets in the current year in 2013 itself?

A: Given the underperformance of India year-to-date I think that coming back to my thesis of investor rotation into markets like China and India ,it is entirely possible that we could see the Indian market between now and year end up a good 10 percent after this very difficult market environment that we have seen so far this year.

I don’t necessarily say it is going to start today, but I think that the right strategy over the next two months, maximum three months is to average back into markets such as India and China, and not immediately but at the later stage into Brazil, which obviously is very cheap as well.

Q: Do you expect investor preference for defensive stocks over cyclical stocks to continue, for instance in a market like India defensive stocks have already been extremely overvalued? Would you still bet on them?

A: Absolutely not. I think the one theme of markets, for the moment worldwide and including India is that defensive stocks are at a near record high valuation relative to cyclicals.

One thing that we believe very strongly is that in the current time, in the next few weeks and certainly in the next month, it is time to rotate out of overpriced defensives into undervalued cyclicals.

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