The Organisation of Petroleum Exporting Countries retained its crude production ceiling despite oversupply which led to severe fall in prices with Brent crude falling a four-year low of USD 72 per bbl on Thursday. Speaking to CNBC-TV18, Hans Goetti, Head of Investment Asia, BIL said crude prices are likely to fall further.
According to him, Saudis are targeting the US oil shale industry and lower crude oil prices also tend to hurt economies like Russia and Iran. He expects crude prices to fall up to USD 55 per bbl though that level will not hold for very long, but could see some consolidation move between USD 75-80 per bbl level, he added.
Meanwhile, Goetti does not see a return in crude prices to USD 90 per bbl or above any time soon. “There seems pretty much oil around and it’s not necessarily the lack of demand but it’s an oversupply globally,” said Goetti.
Below is verbatim transcript of the interview:
Q: Indian market is running on steroids now but the reason for that is the kind of slide that we had in crude prices. Do you think this slide will continue or this downward tick is going to continue and would you be now incrementally more bullish on Indian market?
A: I have been bullish on India for quite some time. The crude price helps of course. We see further weakness ahead because it seems the Saudis are targeting the US oil shale industry and lower crude oil prices also tend to hurt economies like Russia and Iran.
On the other hand, the clear beneficiary of the fall is India and the American consumer, who enjoys the equivalent of a tax cut. So we have winners and we have losers but it looks like the crude oil price could go down even more from here.
Q: When you say that crude prices could soften further from current levels, what are the targets that you are working with as well as the timeline?
A: On technical basis, we are near support right now but we could see crude oil prices going below USD 60 per bbl, maybe as low as USD 55 per bbl. I do not think they will stay there for very long but could see some consolidation move between USD 75-80 per bbl level. But I do not think we are going to see a return to USD 90 per bbl or above anytime soon. There seems pretty much oil around and it’s not necessarily the lack of demand but it’s an oversupply globally.
Q: In terms of India versus China trade from hereon, do you think Indian market can continue to outperform China or as some experts are saying maybe 2015 would be about China and some money may go out of India?
A: We think both markets can go up but for different reasons. In India you have a re-rating story, the fundamentals improving, new political environment, lot of emergence of investment cycle sooner or later.
In China you have a slowing economy but now you have a central bank which is trying to stimulate growth and the first thing that happens when you do that is you have rising asset prices especially equity prices right now. So, you could easily have slowing economy in China but rising equity prices, equities in China are extremely cheap.
We had underperformance for a number of years, a lot of bad news, the slowing economy and everything is discounted in the price. So, China has quite a bit of an upside here but as does India.
Q: To illustrate this better, if you had 100 percent in terms of fresh portfolio allocation at this point in time and you could allocate it across global equities in whatever proportion you would like, what would it stand at?
A: We have an overweight in Europe, in Japan and neutral rating in the US. If you are looking in percentage terms then US will be around 40 percent, Europe around 35 percent, Japan around 20 percent and the rest would be divided into Asian markets.
We like China, we like India as well, so that is the allocation that we will see at the moment. Having said that, as an asset class we overweight equities over bond and so, the focus remains on equities as long as central bank policies around the world remain supportive.
Q: If around 10 percent of your portfolio is towards Asia and that includes China and India, how would you divide that between the two countries? Has there been an increase in India versus other emerging markets as well?
A: We have had a sizeable positioning in India for quite some time. We have increased the allocation to China and I would count Japan into Asia, everybody talks about Asia ex-Japan. But in Asia, Japan is one of our major markets because of low valuations, extremely supportive central bank, pension reform, share buybacks and more shareholder friendly environment. So Japan, China, India remain our three favourite markets and India, going into 2015 we do not see that changing for the next 6-12 months.
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