Equity valuations globally appear stretched, says Michael Every, Head of Markets Research, Asia-Pacific, Rabobank. And that holds for India as well, he says.
In an interview with CNBC-TV18, Every says global investors are concerned about the outcome of the US Fed meet this week. He says equity markets could fall if the US Fed takes a hawkish view
Every does not see the Fed hiking rates before the last quarter of this calendar.
On India, Every says global investors are excited about the government’s reform agenda.
He sees China’s markets underperforming for a while because of its weakening economy.
Below is the transcript of Michael Every's interview with Latha Venkatesh & Sonia Shenoy.
Latha: Month to date and especially even if you counted the last two weeks, India’s underperformance stands out. Has India changed in the pecking order for you among emerging markets candidates?
A: I do not think so. We have to take a step back sometimes and realise just how far we have come. First of all India is still very much in investors’ spotlight, everyone is still very excited about the potential reforms under Mr. Modi premiership but at the same we have come very far in a very short period of time and people should take step back for a moment and lock in some profit.
Latha: Nevertheless some things have turned against India, for instance crude price fall which at USD 45 per bbl was very attractive for India, is now moved up a good 30 percent. Would this in particular mean that you would want to readjust the pecking order in emerging markets?
A: Not really because if you think about it a year ago oil was trading around USD 100 per bbl then we went down to USD 50 per bbl and since then we have managed to come back up to around USD 60 per bbl depending on which measure you look at.
If a year ago you were to say to India, how would you react in an economy with oil at USD 60 per bbl rather than USD 100 per bbl? I think everyone would have beaten your hand on. I think sometimes we have to just think how much improvement we have seen.
Sonia: As you mentioned if this is merely profit booking that we are seeing in the Indian markets, at what point does India become attractive again for a buyer. Does it become attractive right now or do you think that there is still some downside to go?
A: I think it becomes part of the global issue because we have the US Federal Reserve meeting this week and lot of people are extremely nervous about what sentiment we will be getting coming out of that meeting. If we get hawkish sentiment coming out of the meeting, I would imagine globally equities will be coming off and I do not think that India will be able to stand against that particular tied, but of course if we get more dovish message coming from there then people will be looking to be risk on and India will still be towards the front of the queue.
Latha: What is your base case as you await the Federal Open Market Committee (FOMC) statement given the kind of inflation numbers and growth numbers?
A: As a house Rabo is relatively bearish. We have been saying all year that we do not think the Federal Reserve will raise interest rate until Q4 and other houses were calling for the Q1, Q2 much earlier than we were. Now everyone is back to line up behind us and they think it will be later Fed fund hike and definitely to a much lower peak than people previously been thinking and that should continue to be generally bullish for equities even if valuations in some markets are starting to look stretched.
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Sonia: Hypothetically if what you are saying plays out that the Fed Reserve does not give any indication of when the first rate hike will come in and will get the rate hike later rather than sooner then what would your own pecking order be within the emerging markets or the Brazil, Russia, India, China (BRIC) nations?
A: Within the BRIC obviously at the moment China continues to power ahead but that’s the market that makes me the most nervous because from fundamental perspective that’s the market that should be underperforming rather than outperforming and within the other two Brazil and Russia; I do not see too much good news there. India, the market has come a long way, very far but at the same time fundamental story in India is much more positive than any other BRIC.
Latha: But don’t you worry about the current result season, many of the numbers have come below street estimates. What is your reading of the earnings so far and what are you expecting hereafter this season?
A: To be honest, if it’s not India specific issue generally earnings and prices of equities are somewhat an alignment in most global markets. I was pointing to the fact that central banks will continue to drive sentiment and the FOMC more so and that is the global backdrop. Whist I am still bullish about the India’s fundamentals. I did made clear that equities are quite stretched and valuations almost everywhere but if we continue to see central bank liquidity pumps in then people will look beyond that and continue to buy equity.
Sonia: We had a very exciting year last year – 2014. We got more than 30 percent returns in the index. By the end of 2015 what is the sense you are getting about what the average returns could be from the Indian markets?
A: I wouldn’t want to put my neck out and give a precise figure but provided that we continue to have an extremely positive central bank liquidity backdrop, I do not see why we cannot continue to eek out further gains. The big risk of course for the downside will be policy errors either from the FOMC, from another major central bank or from the government itself. So provided we do not get any of those and further upside is still likely. I do not think it’s likely to be another 30 percent.
Latha: What would constitute a policy error from the Indian central bank and give us your view of the rupee, it has seen some minor depreciation in the past two weeks?
A: Policy errors can to be to be too loose for too long or too tight-too quickly. I do not think we are going to see rate hike, I do not think we are going to see risk of interest rate going up. It is possible that interest rates may not go down fast enough - that’s the risk if the economy should slow but I do not think that’s too much for danger. The other risk becomes whether we actually see the opposite whether interest rates comes down too fast. I do not think we are seeing any sign of that either. I think we are seeing relatively prudent monetary policy.
Latha: Rupee – you expect more depreciation?
A: Moderately so because the dollar is on a secular bull trend against the most major currencies but at the same time you have to say that the rupee is a standout currency in terms of how much stability against the dollar it has shown over the past six months. It's actually quite remarkable.
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