Michael Kurtz of Nomura believes India will continue to gain from lower commodity prices
"India is our largest overweight recommendation within Asian markets, ex-Japan," says Michael Kurtz, chief Asia equity strategist at Nomura. He in fact has a Sensex target of 33500 for December end or early 2016.
He believes India will continue to gain from lower commodity prices. He also managed to quell all doubts regarding rising crude oil prices, which ultimately can be detrimental to India's growth forecast. According to him, given the US Federal Reserve's stance, it appears as though an interest rate hike will happen only in March. This will lead to stronger dollar and a strong dollar pushes crude price down, he told CNBC-TV18.
However, he believes investors will be keeping an eye on the outcome of Bihar election. Kurtz says global investors are looking for Prime Minister Narendra Modi gaining gradual political capital and his theory of pro-growth gaining more ground. Revitalising entrepreneurial risk taking is imperative and in that sense even a single state election is important.
Below is the verbatim transcript of Michael Kurtz's interview with Latha Venkatesh & Sonia Shenoy.
Latha: Are you worried about the performance of the central government of Narendra Modi party in this state of Bihar. Is that something on your radar?
A: It very much is, in the sense that we been hoping to see a gradual and long-term accumulation of political capital by the Bharatiya Janata Party (BJP) coalition. It is important that over the longer term Prime Minister Modi continue to make the case with the Indian people for pro growth policies for a gradual stripping down of the welfare state and finding ways to liberalise the Indian economy in ways they revitalise and reenergise entrepreneurial risk taking and private sector investment. In that sense even an individual state level setback is something that we take seriously, but I also wouldn't want to go so far as to interpret this as evidence that public support for liberalisation reform and pro growth policy has peaked and it is going to swing in the other direction.
Sonia: What about the global market. Yesterday an expert was making the point that all those global investors who sold in May and went away have returned now in the month of October. Is that the sense you are getting as well that global equities are back in a risk on mode?
A: I think there is a seasonality component to the better tone in market recently, as remarkable as it is it is nonetheless the case that almost all gains in global equities over the past decade have occurred between the months of November and April. So there is a strong seasonality component. I do believe that critical fundamental developments have also been underpinning the equity asset class more recently.
However, most importantly for Asian emerging markets and it's something that is very important for India in particular is the pushing out of expectations about when the Fed would begin to raise interest rates, as a result of the weaker labour data that came out on Friday last week, the so-called non-farm payroll release out of the US.
Latha: Are you getting a sense that this liquidity rally apparently that started after the weak non-farm payroll numbers has more legs given that it's also coming at the seasonally positive time for global equities. Are we going to see more gains for developed markets and generally risk assets?
A: I do think there is room for further, what we might describe as a relief rally in risk assets generally, and the reason I say that is because if we look at the Fed fund futures market, there is still pricing today about 38 or even 40 percent possibility that the Fed will still be lifting rates in December and as a result if things progress between now and the end of the year in such a way that the Fed does choose to put off interest rate lift off until early 2016, clearly that 38 percent probability will have to continue dropping down in the direction of zero and as near term interest rate hike expectations fall then that should provide additional comfort level, additional relief for markets in Asia that are particularly sensitive either to interest rates as a result of the sectoral make up of the local markets or sensitive to currency risk and currency volatility. India certainly by virtue of its current account deficit falls into the category of those markets that tend to be a bit more sensitive to Fed interest rate and therefore India should be in a position to continue to get some short-term relief.
Sonia: What are your top preferred markets from now for the next six months and what kind of an upside do you see?
A: We are in fact still quite positive on India. India is in fact my largest overweight recommendation within the Asia Pacific ex-Japan region and our local strategists are looking for a Sensex target now of 33,500. My second most favourite market in the region is Taiwan where I see a very positive combination of both leverage to the ongoing to recovery in the United States and in Europe, as well as a large current account surplus which should give it more resilience in the oncoming Fed lift-off that we do still expect to come in March of next year.
Between the two of them, India much more a beneficiary of lower commodity prices that happened as China slows down. And Taiwan a beneficiary of the pick-up in developed market growth, gives investors, we think, a fairly well diversified upside performance prospect for their portfolios.
Latha: From what you say, you are not expecting this oil price and even to some extent other commodity recovery to have many legs? If oil prices indeed recover at the pace they have done over the last week, then the Indian outperformance will not be what it was in the last 12 months.
A: You are absolutely right about our view on oil prices and commodity prices more generally. If the Fed is merely delaying the eventual rate hikes and again, we do believe that hikes will commence in March, then the dollar should remain fairly well supported as we look into next year and a strong dollar tends to push down oil prices and commodity prices.
Similarly, we have very recently downgraded our Chinese gross domestic product (GDP) growth expectations. We are now looking for in fact less than 6 percent growth in 2016, 5.8 percent to be exact. And a slowing China is also going to remain a downward factor for commodity prices as well.
Now, while China slowing down is not good for any market in Asia, it is at least the case for India that being a large importer of energy and a large importer of hard commodities, that India at least comes out on the winning side when it comes to the China impact on global commodity and energy prices. And in that sense, India at least offers a bit of an opportunity to hedge one's position within the Asian region in the event that China does become more of a drag for the commodity complex.
Sonia: So, when you said 33,500 was your target, what is your timeline?
A: That was originally an end of 2015 forecast. At this point, we are probably comfortable saying that we would push that into early 2016. But we are really quite confident that India is going to produce some of the strongest GDP growth in the region. And ultimately much of that translating into much better looking bottomline earnings growth, particularly as some of the decline in input prices begins to actually percolate down to the bottomline profitability and net income margin performance by Indian companies.The Great Diwali Discount!
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