May 08, 2012, 07.31 PM | Source: CNBC-TV18
Manpreet Gill, senior investment strategist, Standard Chartered has a neutral stance on Indian equities and believes that India is still fundamentally weak due to high inflation.
"Inflation has come off from some of its highs, but it remains a little bit too sticky for the RBI to ease in a big way. So, that limits the room for monetary policy to ease when fiscal policy remains so expansionary," he explained in an interview to CNBC-TV18.
Also, no major reforms, which can boost growth have been announced post Budget, this is worrying investors, he added. "One needs to see some progress on these issues before turning more positive on Indian equities relative to the region," he said.
Below is the edited transcript of Gill’s interview with CNBC-TV18. Also watch the accompanying video.
Q: How serious are the political instability issues in Greece? Is it powerful enough to keep the euro down and more importantly keep even global markets on the edge?
A: Definitely, the situation in Greece does hold the potential to be quite a big event risk. It has been fairly well flagged. Over the last few months, we have all known that the Greece faced an election in which the incumbents were unlikely to sort of come back to power in a big way.
But, some of the language we are seeing from some of the possible components of new government is not very positive for the existing agreements between lenders and austerity and bailout agreements.
That is the risk that markets are beginning to worry about a little bit and something we need to watch closely to see to what extent that risk could play out over the next few days if we see a government come in place.
Q: In the near-term how do you expect European markets to perform because yesterday after an initial flutter they did manage to pullback?
A: There is always going to be some knee-jerk reaction. Wth the kind of uncertainty we are seeing we might see a bit of day-to-day volatility but at least leaving aside UK and Germany where we are a little bit more positive, fundamentally on the rest of Europe, on the equity markets we are not very positive at the moment.
We still think there is a lot of event risk sort of work through, there is an event in Greece which we have seen what kind of policy we come up with. There is a clearly a shift in sentiment in France as well. Together, we think that is not very positive for most European equity markets, that is not positive for the euro in the short-term.
Euro is interesting because it has ultimately moved through some important technical supports. Fundamentally, we think that will help sort of push it further down towards 1.25 in the short-term.
Q: How are you mapping commodity prices in general and crude prices over the next quarter?
A: On crude specifically we continue to be positive from a slightly longer-term perspective. The reason for that is ultimately there are two big drivers, one is the geo-political risk and to some extent that has come over the past few weeks. If you go back couple of months, there was an element of geo-political risk premium in the price. The situation around Iran has been the bit out of the news recently, that has definitely been one factor that has been priced out to some extent. But in our view, obviously there shouldn’t be any complacency, that is a wild card, that can come back quite quickly.
The second factor in oil prices is the fundamental demand/supply balance. At the end of the day there isn’t a huge amount of flexibility on the supply side and if demand in the two biggest markets in the US and China is going to continue to remain strong, it has sort of continue to trend upwards in China and most emerging markets and then US if we do continue to see small sort of signs of stability in growth data, that is fundamentally positive for demand. From a demand/supply balance, the factors clearly point towards support for oil prices at least over the next few months.
Q: You are quite optimistic on the entire US economy, what is the kind of return that we could expect from US equities?
A: I wouldn’t go as far as to use the word optimistic. We think that the US Economy is in a better place than where we expect it to be a few months ago. That is positive for US equities and we like to think of it more in terms of expressing our overweight view rather than focusing on a single numerical target.
What has changed there is a bit of more arguably sustainable strength is coming through in some of the economic data. You are seeing that in some of the consumer spending data, ISM Manufacturing surveys and some of the components of that as well as the sort of the lending survey, the senior loan officer survey more recently.
So, there are still lot of fundamental weakness, there is a lot of work to be done but some of the data is little better, more sustainable than a few months ago.
Q: What have you made of the Indian equity space, we did get some clarification from the government with respect to the anti-avoidance rules not being applicable this year and we did see that in the run up to that a fairly sharp cut in Indian equities partly driven by global risk-off, are they in an attractive spot at this juncture, are you a buyer at this level or do you think that they will get more attractive?
A: In a regional sort of basis, we are still maintaining our neutral view and the postponement of the GAAR policy is no doubt a positive in terms of a short-term knee-jerk reaction, but it is at the risk of sounding like a broken record. The two fundamental issues we have been focused on, have not changed, one is on the policy side what investors are looking for is some sign of a return to reform related policy that can help kick-start growth over a more fundamental perspective. That still hasn’t been forthcoming on a big scale even after the budget.
The second factor is inflation. Inflation has come off from some of its highs, but it remains a little bit too sticky for the RBI to ease in a big way. So, that limits the room for monetary policy to ease when fiscal policy remains so expansionary. These were the same problems we had a few months ago and they were still very much in place. So, we need to see some progress on these issues before we turn more positive on Indian equities relative to the region.