The global sell off is over for the time being and there could be a relief rally towards the end of this month, feels Geoffrey Dennis, Head of Global Emerging Market Strategy at UBS. In an interview with CNBC-TV18’s Latha Venkatesh, he says the problems in Russia are unlikely to have a major impact on the global economy in 2015.
Markets currently offer a good medium term buying opportunity, and while it is tough to call a bottom, Dennis says he would certainly not take a bearish view.
According to Dennis, Russia’s debt to GDP ratio is not too high and it has a good buffer of forex reserves. Hence the probability of a sovereign default is minimal. However, some companies and banks in Russia could be in trouble and may have to be bailed out. Still this is unlikely to impact the global banking system.
Dennis is bullish on India and says the recent correction should be viewed in the context of the global market turmoil. He sees 2015 as being a challenging year for emerging markets as the Fed is likely to hike rates sometime in the middle of the year. Also, corporate earnings in most emerging markets were likely to be under pressure. On both counts India is expected to do much better as the economy is recovering, corporate earnings growth too is improving and the government is pushing through key reforms. That makes India the best bet in the emerging market space, Dennis says.
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Below is verbatim transcript of the interview:
Q: Is the global wobble we saw, the little bit of risk aversion we saw, the six-day fall in most global markets just got over or do you think it is over just for the moment and we are going to see it up until the end of the year?
A: We think it’s over for the time being. As far as we are concerned, the big driver of this particular sell-off was what was going on in Russia, the collapse in oil prices particularly since the Organisation of the Petroleum Exporting Countries (OPEC) meeting in late November and the turmoil in Russia.
We feel that the central bank have a good chance to stabilise the ruble around this level and the impact of this particular turmoil on the global economy in 2015 will be relatively slow. We feel it’s a medium-term buying opportunity but as usual it is trying hard to tick the exact bottom but we are not turning bearish here.
Q: We have been getting a bunch of opinions from various brokerages and banks that Russia in any case may not create a domino ripple effect in the global banking system that the sovereign is way to rich and hardly indebted to have any sovereign default that is absolutely not on the cards as well the banking system in Russia already because of the sanctions has been having fewer connection, so a domino effect of defaults is unlikely and therefore even if there are problems in Russia, it will not have a ripple effect?
A: You are right. There are so many aspects; the risk of sovereign default is very low, indeed Russia has a low debt to gross domestic product (GDP) ratio; they have high net worth reserves.
We think about USD 300 billion usable reserves, so the risk of sovereign default is minimal at this point. So what we are worried about is – (1) the risk of corporate default because number of corporate which have to raise funds, of course they are shutout of international markets because of the sanctions.
We have to keep an eye on the corporate and what happens there including to what extent they may get bailed out by the government and then the whole issue over the banks and the economy is that the economy is going to be very weak in 2015, so there could be some significant problems for the Russian banks but we are not sure that is going to lead to a problem in the global banking system overall.
Q: Are we done with the correction in India? We have already seen its fall of about 6-7 percent from the record levels. Would you be a buyer on India at current levels and what kind of gains could we see next year for India?
A: We would certainly be a buyer of India at this point. We are overweight India in our global emerging market portfolio. I think you had the sell-off in India in context of what’s going on in the global markets.
It was the OPEC meeting in late November that triggered this particular element of turmoil and of course India is a huge beneficiary of low oil prices.
Therefore, we put it in a global context; the emerging markets are down since the OPEC meeting. We think India can probably from this sort of levels gain 10-15 percent next year.
We think it is going to be another quite challenging year for the emerging markets because we expect the Federal Reserves to be raising rates some time in middle of the year.
We think this a big challenge to the emerging markets companies to generate earnings growth and in absolute context India is one of the best places to be, corporate doing well, the reforms are moving and the economy is still on boom. So I think it’s a global correction and it really sucks India into it and we expect it’s a nice buying opportunity in 2015.Q: Was the sell-off that we saw in this entire basket related to Russia, and now as a category will EM continue to see selling or is that over at least for the year?
A: It is hard to contemplate because what matter here is where the ruble and where the oil price level are. What is interesting is the correlation between the oil price in emerging markets are positive though low oil prices tend to pull down emerging markets initially, the dollar tends to rally when oil prices are down. I think you get the benefit of low oil prices places like India and other parts of Asia in the long-term.
It had very big negative effects on the Russian economy, which we all know and once oil bottoms out, which we think it will probably do around these levels and if the ruble level back as well.
I think you will get a run into the end of the year. So, we are constructive for the medium-term but we also tend to think that this sell-off is over for now. It probably gets some sort of a modest rally into the end of the year.
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