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Mark Mathew of Merriyll Lynch has said that India will be amongst the least preferred markets in Asia if oil stays high. The food price and inflation concerns not as serious as crude.
He likes India from a stock-picking perspective and select companies in banking, engineering space in
Excerpts from CNBC-TV18's exclusive interview with Mark Mathew
Q: Given the crude oil situation would India be one of your least favourite markets now in the Asian region?
A: Yes, it would be one of the least preferred markets in Asia if the oil prices stay high. We did an Oil Sensitivity Analysis two weeks ago using seven variables to measure the impact of high oil price on economies and stock markets across Asia and I am afraid that India did not square very well.
Q: Is there anything else which is worrying you about India in terms of either politics or recent policy action surrounding the crude mess that we find ourselves in, which is also sort of querying the pitch for this market?
A: Of course there are political issues and issues relating to food price inflation, but these problems don’t really mean as mush as the crude oil price. The Indian market has given back almost everything from the last year or so. So it is now down to valuations, which is almost attractive for the whole market. Some large stocks in India are extremely well placed. So from a bottom up point of view I would be very comfortable with a few Indian stocks here.
Q: So aside from the under performance of the market as a whole, you are saying that you would want to start increasing allocation to a couple of specific sectors or stories?
A: Yes that is correct, particularly in the banking sector and the engineering space. There are very well run companies which still have good growth that are down to valuations that I deem attractive. The biggest bank in India is trading pretty much at one-time the book. The biggest engineering company is also very well placed. So from a stock picking point of view I like India and from a top down point of view it is still one of the markets in Asia that appears more vulnerable.
Q: The point on Oil sensitivity, is there a one-to-one relation that can be drawn with crude prices and how much equity markets tend to under perform in that ratio?
A: We were measuring the impact of oil on economies, on inflation, on earnings, on GDP growth etc. When we added up all these things using seven different variables we found that India did not score well. I cannot exactly remember which points India scored most poorly on.
Q: What’s your own take on crude, because for a lot of people the call on the Indian equity market has become de facto a call on whether crude will cool down or not. Is it easy to take a call on that or does it remain the big joker in the pack globally?
A: It certainly does remain the big joker in the pack globally. It is hardly just India that is being impacted by this. Were it not for this high oil price, Asian stock markets would not have had this down draft over these 4 to 6 weeks. We were recovering quite nicely after the Bear Stearns and perhaps got a little ahead of ourselves. But I still think that it was that sudden jump in oil over the last two and a half month that has upset the apple cart. It is very difficult for Asia to perform with oil at USD 130per barrel. So unfortunately our own forecast at Merrill Lynch is for oil to remain stubbornly high, between USD 110-120/bbl for four years on an average. It would be difficult to get ragingly bullish on Asia or India with crude near USD 100/bbl. But from a bottom up perspective there certainly are stocks which stand out as being attractive valuations.
Q: If for some reason say crude cools down to say USD 115/bbl and gives up USD 15-20 from the top would that be good enough to spark off a big rally across Asia and a sustainable rally?
A: I don’t think a USD 115/bbl would be enough, I think crude will need to get back to sub USD 100/bbl range. But I think they could see some kind of recovery but I doubt at USD 115/bbl it would be a sustainable one.
Q: What is your own sense of how the rest of the year might shape up for a market like India or China because for the first half we have has almost been a geared version of the developed markets, overdoing the nervousness and overdoing fall for many markets in the US or even in Europe?
A: India and China are very different because China has enormous export earnings and very high foreign exchange reserve, so they can easily afford to maintain their subsidy and I think they probably will.
The other thing with China is, there already has been good evidence that their food price inflation has come off. It’s been very rainy in Hong Kong and Southern China over the past few weeks. Monsoon is considered to be a good thing in India but unfortunately when there are very heavy rains in China it can destroy crops. The fall in food prices in China maybe at risk with these heavy rains that we have had over the last two weeks, but it’s too early to tell.
So I am optimistic about China. We have seen the peak in inflation and it’s going to come down. I hope I could say that the worst has been seen in food price inflation in India
Q: One last question on the interest rate situation which has been hardening. Repo rates went up last week. How much of a headwind do you see for the Indian equity market, you were speaking about banks a while back?
A: It also depends on the growth trajectory in the country. Rising rates don’t necessarily have to destroy a stock market, if you have got very strong growth. The inconvenience in India is that the growth this year is going to be a bit lower than it was last year. In EPS terms it should be about half of what it was about last year.
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Today's Special Column
with Pronab Sen
Union Ministry of Statistics and Programme Implementation , Chief Statistician and Secretary
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