Oil price fall key mid-term driver for India: Deutsche Bk

John-Paul Smith, Global EM Equity Strategist, Deutsche Bank believes that the uncertainty surrounding Greece and Spain will not be resolved quickly and will continue to produce volatility in the market.

While the outlook for global equities remains mixed, Smith is of the view that US alone can pull equity markets out of this uncertainty on a sustainable basis. “As long as the fiscal uncertainty prevails in the US, we are unlikely to see any return to the growth rates, which would be sufficient to give the equity markets a successful tailwind,” he cautions. Also Read: See gradual recovery in growth in H2 of FY13: HSBC  In his opinion, strategy investors need to adopt a fairly contrarian view or simply buy and hold over the long-term and not worry too much about the short-term fluctuations. Smith remains downbeat about the prospects for emerging markets. Over the medium term, the outlook for China is still very poor. Furthermore, investors, having been quite pessimistic about emerging markets, are not exhibiting relatively high levels of optimism. “We are sticking with our underweight recommendation, but clearly, the markets could have a little bit of a move from here,” he said. According to Smith, the key driver for India, over the medium-term is if we start to see a sustained fall in oil prices. “First of all, it would reduce the level of subsidies and also current account deficit or rather the cost of subsidies. It would also provide the government with some sort of lubrication in order to enact further reforms.” Below is the verbatim transcript of the interview Q: How worried are you about the uncertainty with respect to Spain and Greece? Would that become a negative for the market or will it only cause minor jitters? A: At the moment, we can see the pressures with respect to Spain and Greece among the European authorities and also the respective governments in terms of what’s happening on the street there and also the fiscal pressures coming from the European authorities. I think it is a very difficult situation. Clearly, this issue will not be resolved very quickly and it will continue to produce volatility in the market. But what is happening in Europe, at the moment, is an extension of what we have seen in the last 1.5 years, namely that we have some sort of policy action, which is then followed by a reaction. This ongoing relationship continues to produce volatility in the market, and that is exactly what we are seeing now. We had a big run up in the markets, now we are seeing them come back on the back of renewed uncertainty. Q: As we head into the year-end, what is the prognosis of how global equities will, therefore, pan out especially for an equity investor? A: The outlook is very, very mixed. On the one hand, we have the liquidity provided by the QE and an open-ended commitment from the Fed and a backstop from the ECB as well. On the other hand, what we see very clearly in Europe, in particular, is the dearth of economic growth, which is a theme, we have been talking about now for sometime. Even in the US, where we have had successive rounds of QE and where we have had a reasonably big devaluation of exchange rate albeit 3 or 4 years ago, we are seeing very little in the way of growth, and that is the problem. It is really only the US that can pull equity markets out of this on a sustainable basis. As long as the fiscal uncertainty prevails in the US, we are unlikely to see any return to the growth rates, which would be sufficient to give the equity markets a successful tailwind. Again, we are in this environment of continued volatility and uncertainty. The strategy investors need to adopt a fairly contrarian view or simply buy and hold over the long-term and not worry too much about the short-term fluctuations. _PAGEBREAK_ Q: Many foreign market watchers are getting incrementally bullish on emerging markets versus developed markets. Do you concur with that view? A: We have been relatively downbeat about the relative prospects for emerging markets for about two years. In relative terms, we would like to stay with that. I think a lot of the negative factors generally are still there with the partial exception of India, which will come onto later. But certainly for the other three BRICS, the fundamental drivers, particularly the policy drivers, are still generally negative. For the short-term, there is a possibility that markets could move higher and we could even get quite a sharp bounce from here, particularly as the economic outlook in China is picking up a little bit. But I think that is purely on a short-term basis. Over the medium term, the outlook for China is still very poor. I continue to believe that will pull commodity prices down including energy prices, which at least for oil, have been relatively resilient so far. The other point is that investors, having been quite pessimistic about emerging markets, are not exhibiting relatively high levels of optimism. It tends to be a contrarian signal normally. We are sticking with our underweight recommendation, but clearly, the markets could have a little bit of a move from here. Q: Within the emerging markets, do you like India and do you see more follow-through both on the policy and on equities buying by foreigners? A: Our Indian team and our Asia Pacific strategist Ajay Kapur, are both very bullish on India. Ajay has got a big overweight recommendation, and so far, that has worked extremely well. I am a little less convinced. I am actually neutral to overweight in India. I agree with Ajay, the level of valuations in the market relative to the history is extremely attractive. But I worry a little about the political economy. I think what has happened on the reforms side so far is extremely positive. But obviously, there is a long way to go. With India, the fundamental drivers should be relatively positive. Again, I think investors will need to take a fairly contrarian stance to the market. The key driver, though for India over the medium-term and what would make me more bullish, is if we start to see a sustained fall in oil prices. I think that would do a number of things. First of all, it would reduce the level of subsidies and also current account deficit or rather the cost of subsidies. It would also provide the government with some sort of lubrication in order to enact further reforms. So, it would make things just a little bit easier for them and it would also push in the population a little bit from the adverse effect of the changes that have to be made. I would like to see a sustained decrease in the oil price, which we will see at some point. But the problem is that with QE, maybe that movement has been deferred a little bit for now.