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Jul 12, 2012, 08.23 AM IST
A depreciating rupee poses huge challenges for Indian equities which are likely to face weakness. That's the word coming from Manpreet Gill, senior investment strategist at Standard Chartered.
A depreciating rupee poses huge challenges for Indian equities which are likely to face weakness. That’s the word coming from Manpreet Gill, senior investment strategist at Standard Chartered.
He says the outlook on the rupee is relatively uncertain when you compare it with other currencies and sectors as it is one of the most volatile currencies in the region. “But we think the risk-reward is gradually improving and we think a strategy of sort of averaging into Indian assets may still make a lot of sense at this time,” he cautions.
Below is an edited transcript of his interview. Watch the accompanying video for more.
Q: On the data which has come out China, imports now stand at only about 6.3%, way lower than expectation of about 11%. What would all this mean for commodities and even for growth for China?
A: Where we find this data interesting is actually more from a policy perspective. This kind of weak data in our view has largely priced in a lot of Chinese assets. They have been weak you go back a few months. Where we find this data interesting is that it obviously gives policymakers much more room to loosen policy as they have already begun to do on the monetary side, much more room to stimulate on the fiscal side and that’s actually good for a lot of risky assets rather than bad.
Q: What is the take on commodities itself? Will we see sustained pressure at current levels or even further falls in key commodities like crude and commodities?
A: It depends on the commodity. In a few specific metals like copper, we think Chinese stimulus is actually positive for the metal. Copper is a great example where a bulk of the demand does ultimately come from China and construction related sectors in China. So that may be supportive on the margin especially as I was seeing some of the stocks beginning to get depleted. But in crude oil, we believe that’s more driven by the changes in supply picture.
Over the last quarter we have seen a fairly significant rise in supply. We saw a rise in inventory in many key markets such as the US and that’s beginning to sort of normalise in some sense, if you look at some of the latest weekly inventory data out of the US for example. We think that when you combine normalization of supply, production together with the rising geopolitical risk, that’s actually supportive for crude. So we are at least looking at gradually higher prices.
Q: There has been a relative outperformance of the Indian equity markets for the past few weeks and we are seeing even the dollar-rupee top off at about the 56 levels these days. A lower commodity price theme has led to some people interpreting it as a buy India, sell commodity players like Indonesia and maybe some other commodity players as well. Do Indian equities sufficiently reflect the fallen commodities or is there more juice here?
A: I wouldn’t view it so much as driven alone by commodities. In our view what makes Indian equities more interesting is purely the fact that how much the rupee has fallen. What I mentioned last time I was here is that from a dollar investor’s perspective that obviously improves the risk-reward a little bit on the margin. A lot of the concerns are still there.
If anything from a commodity price point of view, if there is an upside risk to oil prices, that represents a downside risk for Indian equities and the rupee, but given where the rupee is the outlook is relatively uncertain when you compare it with other currencies and sectors. But we think the risk-reward is gradually improving and we think a strategy of sort of averaging into Indian assets may still make a lot of sense at this time.
Q: The dollar-rupee becomes attractive at 56-57 only if the assumption is that it will not get worse. Is that the assumption you are working with?
A: The part of the region we think about averaging is because we recognise that it could get worse and that may have nothing to do with what’s happening within India, but the fact that the rupee is one of the most volatile currencies in the region and if you see a worsening of the situation in Europe, even if that’s temporary it could lead to a short-lived spike higher in dollar-rupee.
What we believe is a better strategy is to recognize there is volatility. Risk-reward like I said is more attractive. So maybe a strategy of averaging in for any investor who wants to buy assets with at least a medium-term time horizon is what makes sense. Dollar-rupee at least provides you that kind of opportunity if you have a long enough time horizon.
Q: What’s your take on the peripheral European markets? The EU Summit euphoria has faded and the bond yields for Spain are back to that 7% mark, Italy as well is consistent above that 6% mark. How are these two markets expected to play out now?
A: The fact that the euphoria subsided really isn’t a huge surprise, because to us while the summit really addressed the bank recapitalisation issue, the summit really didn’t make a lot of progress in terms of credibly capping sovereign yields. In our mind that’s really still the main risk and we are seeing that flare up again. We have been underweight European equities for a long time. We think that’s still the correct strategy. At the most we would consider some attractive dividend yield plays in the region, but largely we still think from an equity market perspective there are better gains we had elsewhere in the developed world.
US equities for example look much more attractive. In Europe we have still a lot of pressure. We think there is room for the prices to flare up again before policymakers are forced to act and especially if we see ECB’s monetary easing that will be negative for the euro. As a foreign investor it doesn’t help if you own euro denominated assets.
Q: How much more easing can we expect from China because it has already cut rates twice in the last one month or so? Is easing from policy makers in China going to precede very weak economic data from China and hence there was no possibility of Chinese weak growth derailing the global economy and raising concerns in stoking sell-offs perhaps?
A: There is definitely room for them to ease on the monetary policy side. I won't be surprised if we saw any more rate cuts but remember there is also room to ease on the required reserve ratio side. There is a lot of room to ease in terms of specific individual policies. The housing market for example has many restrictions in place. And even an incremental reduction in those restrictions can be positive for Chinese assets and housing in some parts in particular.
The point is that a lot of these measures ultimately come into effect; you see the effect in the macro data about six to eight months down the line. So you’ll expect to see the impact of the policy changes today in the economic data only about a quarter or two ahead. But in our view, the markets are beginning to price in some of that improvement already and that’s why in the equity markets we are overweight.
Even on the corporate credit side we think Chinese developers high yield bounds are looking increasing interesting. So the time to participate in that is now when the policy changes are happening rather then when the economic data improves by which time markets would have more than priced it in.
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