Crude going above $90/bbl risky for India: Chris Wood

Excerpts from Your Stocks on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

Indian markets are still favourite among global investors as they are expecting Fed's committment of quantitative easing (QE2) to be a booster.

 

In an interview to CNBC-TV18, Chris Wood of CLSA said that emerging markets will benefit from QE2. Being bullish on the Indian markets, Wood is expecting gross domestic product to grow atleast 8-9%. According to him, infrastructure growth is important for India.

 

However, he is concerned that biggest risk for India is crude price going above USD90/bbl. According to Wood, financial bets could take crude higher in near-term.

 

On world economy, he said that China rate hike fear is overhyped. He, however, thinks that Euro debt crisis may be risky for markets.

Below is a verbatim transcript. Also watch the accompanying video.

Q: What is the sense that you get from investors that you have been speaking too so far? Is buy emerging markets becoming a consensus theme or even a crowded trade?

A: Buy emerging markets is indeed a consensus view in the sense that investors globally recognise that Asia and the emerging market asset class is the best story globally. In my view, however, it is going to remain the best story.

My view is the second wave of quantitative easing in America is likely to have the same consequences of the first wave that is the biggest beneficiaries of quantitative easing will be the emerging market asset class.

Q: Because its consensus now, do you see the possibility or the threat of some kind of a pullback or backslash from this outperformance streak that we have seen for the last many months?

A: Tactically, because my view in recent months has become consensus, at the start of this year it was the opposite. At the start of this year, the view amongst the consensus was that emerging markets have done their thing, the US economy was normalising, the Fed was going to raise rates sooner or later, so people were buying developed markets, buying Japan and selling emerging markets.

In the last three months, clearly, what was non-consensus was either that the Fed would resume quantitative easing and it becomes a consensus. To that extent there is room for the consensus to move away from my view in the short-term. So hope is on that the US economy recovers. People think in the coming months the Fed is going to be raising rates. That will lead to a stronger dollar that will lead to some underperformance by emerging markets.

From an Indian perspective, however, the biggest near-term technical risk is oil going above USD 90 per bbl because oil spikes hit concerns about the cost of subsidies and raise fiscal concerns here. That would present a buying opportunity in India down the road after a correction.

My view is that any QE driven spike in oil like what had happened the last time there was an oil spike will be short-lived because if oil does spike, it will then lead to weaker demand in the West.

Q: But do you think it's conceivable that in the near-term oil does go to USD 90-100 per bbl?

A: It is clearly conceivable because we have quantitative easing. In fact oil has been a laggard in this commodity rally. Fundamentally, I don't see any reason for oil to go up in the short-term but because of QE and because the other commodities have already rallied and because commodities are now traded by financial investors as another form of buying risk, it is clearly conceivable. In my view, the biggest near-term direction or risk in Indian equities is the price of oil.

Q: What about commodity prices generally? While the fear that you articulate has been in the market, where commodity prices were outperforming, the last couple of days they have sold off because fears of a Chinese interest rate hike. How material is that part of the puzzle in determining where commodity prices head in the near-term?

A: On the China tightening business that's more noise for commodities. I personally don't think this time the China commodity trade is going to be blown up near-term by China tightening noise. While the Chinese are tightening at the margin, in terms of higher reserve requirements, higher rates such moves are not as important from a tightening aspect in China's command economy than the loan growth quota.

So in a command economy banking system like China's, the single most important issue is, what is the loan growth quota, the banks are going to have to conform to. This year the loan growth quota is going to be about 18% loan growth which is not a tightening.

Next year we don't know the hard number but it is probably going to be around 16%. That's a slight tightening but nothing dramatic. The current China tightening noise from my personal perspective is just hype although it is influencing market action in the short-term.

Q: The other fear which has come to the forefront over the last few sessions is from Europe with the news from Ireland and whether we are going to see a bit of a sovereign wobble once again. Do you think that too is noise or are you apprehensive about how things are moving in Europe?

A: This definitely has the potential to cause more risk aversion. On that situation, the interesting feature of market action in recent weeks is that the debt spreads the CDS have blown up, particularly on Portugal and Ireland. The market is basically saying that both these countries debt is going to have to be restructured and some help is going to be required as was the case with Greece.

In the case of Portugal, it grew only about 1% annualized during the boom. It seems unlikely in any extreme that they can meet their fiscal targets. In the case of Ireland, the second bell out of the banks has made the fiscal situation seemingly unsustainable.

The issue for Europe is whether the stability fund which is put in place to handle these issues whether that mechanism works. The reason why this huge surge in CDS has not blown up the euro or European bank stocks is because unlike when Greece blew up a few months ago, now there is a stability fund in place to deal with the cuts of restructuring.

What has begun to worry the markets is that the Germans are seeking to try and put some system in place which will impose hair cuts on bond holders of risky European countries in the future so that is a sentiment.

There is going to be a debt restructuring. If the mechanism place works, it is not really going to blow up but there is any concern that the Germans are going to change the system then there is room for more risk contagion. Personally, that is more of a potential risk to the market in the next three months than the China tightening story.

Q: But do you think that it might lead to a wave of risk aversion? We have seen terrific risk appetite over the last few months globally. A lot of money has been coming to this part of the world. Could the tap be turned off even for a few weeks because of what is happening in Europe or China?

A: It could be. On China, I am not really so worried because if the tightening happens it is happening in context of an economy which is cheap to soft landing and it is not really an aggressive tightening in the sense that if the Chinese announce they are going to halve the loan quota next year from 18 to 9% that would be real tightening. That would definitely smack the Chinese market but I do not expect them to do that. I think the tightening is incremental and is manageable.

Europe does create the risk of more of a selloff. If risk aversion ricochets from CDS of Ireland and Portugal, Greece into European banks stocks and euro that can create more risk aversion undoubtedly and cause more of a selloff. But any such selloffs in Asia triggered by concerns in Europe are a massive buying opportunity because it just ensures that the interest rate remains extremely low in the West for longer.