Moneycontrol
May 07, 2013 10:16 AM IST | Source: CNBC-TV18

Don't see crude rally sustaining: Macquarie's Gibbs

Richard Gibbs, global head, Macquarie Securities believes the rally seen in crude oil is 'a flash in the pan' instead of a sustainable trend. Brent crude rose to USD 105.33 per barrel after Israel struck targets near Damascus, Syria.


Richard Gibbs, global head, Macquarie Securities believes the rally seen in crude oil is 'a flash in the pan' instead of a sustainable trend. Brent crude rose to USD 105.33 per barrel after Israel struck targets near Damascus, Syria.


"I think that's (crude price rally) really against the backdrop of some positive news on the global demand front and it has had a disproportionate impact on producing that price spike. I don’t expect that to be sustained. I suspect like most geopolitical spikes, that will wash through the system in the next week or two," adds Gibbs in an interview to CNBC-TV18.


Below is the edited transcript of Gibbs' interview to CNBC-TV18.


Q: Can you just take us through all the optimism that we have seen in European markets. Do the fundamentals actually justify the five-year highs that they are trading at, at this point?


A: We are seeing that positive momentum coming through obviously from Asian markets this morning and that follows obviously from the US. The US on Friday night reported much better payrolls and some resilience in private demand. What that's done, is basically increase risk appetite across the globe and we are now starting to see that money move around. It is really in search in our view. So, it is going to be looking at those emerging markets (EMs) including India, where there is good opportunity.


Q: What are you advising therefore in terms of asset class preference at this juncture globally, developed market equities, emerging market equities, commodities- across the spectrum, what would be your best place to be invested in for the next quarter or two?


A: At the moment, one is looking at those stocks who can deliver on yield. They tend to be the most stable factors of their economies and that's where one has got pretty good, solid cash flow coming through. Seeing the companies moving and the energy sectors around the world moving, there is a lot of free cash flow in terms of revenue that's been generated.


Q: What have you made of the gain in crude? You think that will sustain or is it perhaps a flash in the pan because of the events in the Middle East?


A: I suspect a flash in the pan. The events in the Middle East do have a disproportionate impact. The Israeli actions against Syria on the border, have really heightened those tensions. So, I think that’s really against the backdrop of some positive news on the global demand front and it has had a disproportionate impact on producing that price spike. I don’t expect that to be sustained. I suspect like most geopolitical spikes, that will wash through the system in the next week or two.


Q: How positive are you on India? We had a credit policy that sounded a bit hawkish in terms of further monetary space being available. It also was very bearish on the economy if the prevailing average of economists is a six percent forecast on economic growth for FY14, the Reserve Bank came with 5.7 percent and the latest purchasing managers index (PMI) numbers seem closer to the Reserve Bank’s estimate than economists estimate. Would money come in and where would we would rank among other Asian emerging markets?


A: On the face of it, the RBI made a fairly hawkish statement. If there is a six percent headline growth number for the Indian economy, there is absolutely no way that I think inflation or the current account deficit (CAD) will be representing an impediment just further.


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It is important to remember that that was what was added to the statement, that inflation and CAD will determine the path of monetary policy. I think inflation is going to under-shoot in India, as it is in most economies and I certainly think that repurchase rate is going to be well under the 7.25 percent.


Q: Just taking that point forward with regards to the Indian markets. What would the pegging order be if you combine the develop markets as well as the emerging markets at this point in time in terms of fresh or a incremental investment from a liquidity perspective because we do have markets such as even Malaysia which are trading at record highs. So, there is some amount of incremental upside, which is still left for India. Where would we be in the pegging order?


A: Malaysia is really relief rally on the back of the tight election. We are going to be careful of Malaysia. It is one of the most affected economies in relation to Japan’s reflation policy along with Taiwan and South Korea. So, on the trade side, Malaysia is really doing it very carefully. If one ranks it on that basis which of the economies that is least likely to be adversely exposed to Japanese reflation policy on the trade side, India is certainly is right on the top of the pegging order because it has very little trade exposure on that side. Greater exposure is ofcourse on the oil side in terms of imports, not exports and I think that we are going to continue to see energy prices waning commodity prices. However, at the end of the day what we are seeing is that resilience of demand is coming through and is being led by the United States. That’s increasing risk appetite and ofcourse, they are going to be looking towards markets such as India where we have had probably the most sell down and under valuation in the last six to nine months.


Q: What about Indian debt? As an asset class that was not really counted among the major emerging market debt, but laws have changed in India and the withholding tax has been cut from 20 percent to 5 percent, there is still a – this is a rationed amount and foreign loans are capped at USD 75 billion as of now of which I guess about USD 32-35 billion is already filled up. Do you think Indian debt will emerge as an attractive alternative for funds?

A: I think it will and I think a very interesting point coming today from one of the colleagues there at Citigroup in India is that he doesn't expect to see much merger and acquisition or debt finance, merger and acquisition activity in India over the next three years as companies trying to pay down debt and to reduce some of their gearings in terms of the balance sheet. That's going to mean, if they are doing that and their cash flows are strong, their debt is going to increasingly trade at a premium ofcourse. Debt is not the risk capital class, it is equity that's risk capital class. So, I think yes, one is going to see that and if that is combined, with some corporate deleveraging, that's going to mean that your prime-rated corporates net debt is going to be trading at very substantial premium.

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