Apr 30, 2013 08:37 AM IST | Source: CNBC-TV18

Why India is Mark Matthews' top pick among EMs

Despite improving macro environment, Mark Matthews, Bank Julius Baer & Co does not see a possibility of a big bull market nor does he see any change of a big sell-off either.

Despite improving macro environment, Mark Matthews, Bank Julius Baer & Co does not see a possibility of a big bull market nor does he see any change of a big sell-off either. "I don't think that commodities or gold are telling us that a big sell-off is coming in equities," he told CNBC-TV18 in an interview.

Matthews is bullish on India after recent fall in commodity prices, mainly that of gold and crude. He believes forex, inflation and interest rates and current account etc, will improve fundamentals of India. 

Below is an edited transcript of the interview on CNBC-TV18.

Q: What is your sense of how the next couple of months may pan out? Generally, will it be a benign situation for equities or do you see any headwinds for global growth brewing?

A: There have been plenty of headwinds for markets that should have made an impact over the past month but didn’t. The Boston bombing, sell-off in gold, Cyprus (issue) and bond market telling you that global growth is going to be very weak and yet the equities are robust. I think that it is really that people want to get their return on their money. They see interest rates being so low -- pension funds and mutual funds -- just desperate for some kind of returns.

That is why the equity markets are going up. I can’t really see a rip-roaring bull market but I don’t see a big sell-off either.

Q: Sometimes in the past, bond and commodity markets have got it right and equity markets have got it wrong. Do you think that might be the case this year?

A: I don’t really know. In fact, the sell-off in gold, in my humble opinion, was very over due. I am not a gold bull. In fact, what happened with gold was very interesting. If one looks at the catalyst, it was the release of the Federal Open Market Committee (FOMC) minutes of April and several FOMC members were hinting that there might scale back the pace of asset purchases.

I guess what has changes since then is that some of the debt has been softer in the Unites States and we have seen a short squeeze in the gold market. I don’t think that commodities or gold are telling us that a big sell-off is coming in equities.

Q: Wasn't speaking about gold as much as crude and copper which are good pointers to global growth and they seem to be suggesting that global growth will actually disappoint in the second half of the year. Should equity markets be pricing that in or should those markets be focused on liquidity per se?

A: If one looks at the performance year-to-date not everything has done well in the equity universe. The United States has done well. Japan has done well. Europe and emerging markets have not. Copper is more in emerging market place so that suggest that China is not probably going to grow. But the markets that have done well will continue to do well which are the United States and Japan. They are both very different stories but the earnings growth in both is good and the valuations are not too high.

Q: What about emerging markets? For the first quarter of the year, they have had the underperformer tag to them could things change now?

A: I don't think so. There are many different emerging markets. I find it’s an asset class, which is grossly generalised and unfairly so. But if one talks about the big ones, which is the Brazil, Russia, India and China (BRIC), then Russia and Brazil tend to follow China because of their big commodity components.

China's official Purchasing Managers' Index (PMI) is tomorrow. HSBC PMI last week was pretty soft as were their industrial profits. China I don’t think it is falling off a cliff and don’t think is growing as fast as the consensus.

The only one left is India and I do like India for a lot of different reasons but if I had to just pick one: it is the country, which benefits in many ways from the decline in gold and oil, which together about 11-12 percent of gross domestic product (GDP). I am not bullish on gold or oil. Therefore, forex, inflation and interest rates and current account -- all those things will improve in India.

Q: Do you fear that at some point during the course of the summer equity markets might start to pricing lower global growth and there could be a bout of risk off generally which envelopes most markets because that is what one worries about the most. How do you think it will not come to that pass?

A: This is the great irony, which I myself wouldn't have got right. However, growth, various leading indicators have been telling us for couple of months and now the actual numbers are as well that global growth has entered into a soft patch here. The US GDP number over the weekend corroborated that. Ironically, the market liked that. It is this thing where bad news is good news because if growth is low it means interest rates will stay low, so isn’t that strange but that is really what is happening in the markets.

I don’t think this soft patch is permanent. We will come off it in the third quarter. On balance I don't really see big sell-off in the market. I don’t see a whole lot to take them that much higher outside of couple of markets that I like, in particular, Japan is probably the foremost there, India as well. Otherwise I need to stay flat for the summer.

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