Richard Gibbs, global head, Macquarie Securities expects commodity prices to decline further ahead. In terms of equities, growth rate in China has slipped below expectation, so foreign investors are likely to take more interest in the Indian market, he says.
He feels low commodity prices is a positive for India and this will provide good opportunity to the Reserve Bank to go for rate cuts. If that happens then it will be positive for the market, he believes.
Below is the edited transcript of his interview to CNBC-TV18.
Q: India has done quite well over the last 7-8 days because of the fall in commodity prices. Do you expect commodity prices to decline further after this current pullback?
A: Yes, prices will decline. We are in a more longer-term structural correction now with commodity prices based around weaker growth outcomes in China and also the new supply that we are seeing coming into bulk global commodity markets. We expect foreign investors to take keen interest in the Indian market.
Q: What does this fall in commodities indicate you about global growth for this year? Is it a warning that growth globally will be lower than what people had pencilled in earlier and would that have ramifications for equity performance per se?
A: It is a reality check. We went into the latest Chinese GDP data with fairly lofty expectations in terms what the economy could do. We had an average growth expectation of 8 percent in the first quarter, but it came at 7.7 percent. It was in line with government expectation of 7.5 percent real GDP growth for 2013.
The commodity markets should now get used to the fact that China will establish itself on a lower growth trajectory and that means with the composition of growth shifting more towards the consumption side, the demand for commodities will not be there it was in previous years.
Q: Does that make the case for India outperforming other emerging markets strong over the next few months, because first few months of the year India has been quite a bit underperformer?
A: Certainly, low commodity prices is positive for India, particularly if they translate through into the energy side of the equation as well. Lat week's inflation data indicates that there is scope for the RBI to reduce interest rates further. Rate cut will be positive for the Indian economy and the markets.
Q: How are developed markets positioned right now? Do you get any suspicion that they are getting overextended on the way up or do you think the recent up moves are fundamentally justified?
A: They are still fundamentally justified. For the major developed markets, in a longer term valuation sense equities are still a long way away from being overpriced, so we are still seeing money coming from the fixed income component, coming through into the equities component and more active management and that is likely to continue as we move through to the middle of this year.
Q: Tactically do you see any kind of risk of a correction in the next couple of months ahead or do you think it will be a summer where equities generally trend higher?
A: The risk of correction have to be based on some shocker on expected development that would most likely come through the euro side, if there was another financial scare there that would lead to some risk aversion coming through.
Slippage in terms of the US economy unlikely because we are seeing some messy data coming through in the US at the moment and the impact of the sequestration measures, but that is not likely to derail the recovery momentum in that economy. So we are likely to continue to see building up of long equity positions as we move forward and the chances of a major route in terms of risk off I would put it around 10 percent or less at this point in time.