Hans Goetti, Head of Investment Asia, Banque Internationale says Indian market is a story that is on the verge of being rerated. In that context, it will remain the favourite of foreign institutional investors for the next two-three years.
Speaking to CNBC-TV18, Goetti also expressed his views on commodity and gold. While he believes commodities are unlikely to make a comeback into a bull market, gold may be bottoming out. "Gold is likely to be building a base and may trend higher in H2FY15." He sees the emerging markets rallying despite a strong dollar.
Below is the transcript of Hans Goetti's interview with Anuj Singhal and Ekta Batra on CNBC-TV18. Anuj: We have seen big quantitative easing (QE) programme from the European Central Bank (ECB). Do you think the equity markets especially the emerging markets would continue to see a big rally or do you see money now flowing to European markets and developed markets and emerging markets underperforming from hereon? A: We don’t think emerging markets will underperform despite the strong dollar, which traditionally would undermine emerging markets. I think this time it maybe a bit different. Draghi clearly delivered. In fact he delivered more than the market expected, which is very significant in the sense that Central Bankers these days are very sensitive of what is happening in the market because the market dictates the real economy and no longer the other way round.
Ekta: Where does India figure in the buying list amongst fund managers globally, where are we in the pecking order when it comes to emerging markets even ex-emerging markets? A: When it comes to emerging markets, India will be very close to the top in fact in our universe, it will be the number one market to be in simply because India does not depend on QE, does not depend on China, it is a story of its own. It is a re-rating story and India is relatively reasonably priced, it will be coming out of a situation in the economy where deleveraging has occurred and we are looking for earnings growth and we are looking at some point for the investment cycle to be revived. So for the next one-two years India should clearly be favoured and overweight within an emerging market context. Anuj: The other point that I want to discuss is what happens with commodities, we have seen gold rally quite a bit, crude prices have also sort of given hints of bottoming out, what is your call on the international commodity prices from hereon? A: There are very strong deflationary pressures in the global economy. It is not only because of commodity prices are down, there are secular forces at work here as well. So commodities will probably not stage any pullback or any rally in anytime soon maybe a rally but not a new bull market, let me put it this way. As far as oil is concerned and that is of course of special interest to India which is a big oil consumer, we have seen historically that over the last decades, the three decades in fact, the USD 40 per barrel level has been a ceiling up to 2002 and after that it has been a floor. So we think that oil has probably pretty much run its course but we would like to see a bottom, a base building phase which could last months before we would actually jump in but we don’t see any big upside in commodities. You mentioned gold which is a very good point because gold for us is not a commodity, gold is a currency and gold has outperformed tremendously over other commodities since last November and that shows clearly that gold is the currency not a commodity.
Ekta: What is your analysis on gold? Do you expect it to bounce back significantly in this year, what are the levels that you would be advising investors on? A: It is quite interesting. If you look at gold in US dollar terms, it is trying to build the bottom but we cannot say that the development is in but if you look at it in yen terms or in euro terms then the bottom is in and this was clearly bottomed out and it seems to be heading higher. Of course that is all a function of the stronger dollar. Nevertheless we are in the middle of a currency was, we had the bombshell by the Swiss National Bank last week and gold will do well when there is currency turmoil. We see Draghi over delivering, the euro probably weakening so in an environment like this, gold should do well and at least we would expect some base building formation and possibly higher prices in the second half of the year. Anuj: What kind of returns can one expect from Indian stock market this year? Last year the market rallied 35 percent, this year, the start was volatile but now we have seen a big rally again in the month of January. For the rest of 2015, is there any number that you think is reasonably justified in terms of a market rally? A: The only worry I would have about India would be the fact that it already has tremendous performance but if you look at the fundamentals, you have for instance corporate earnings of about 4.3 percent of gross domestic product (GDP), we could easily see that going to 6 percent of GDP over the next two years and that would imply a 25 percent earnings growth rate. So earnings growth will be there for the next two-three years and based on that I would think that this year we could see between 15 percent and 20 percent on the upside. I am sticking my neck out here, one should probably not be so specific but that is the kind of upside people are expecting. Ekta: Give us a word on euro. We have seen it already dipped to 11-year low, how much lower do you think it can go? Where do you think it can possibly stabilise? A: That will depend on the Fed. The consensus is that the Fed will start its rate hiking cycle this year probably in Q3. That is the consensus. As long as that consensus is in place, we have these divergences in monetary policy that the dollar will continue to strengthen and of course conversely the euro will continue to go down. Under those circumstances if the consensus is right, the euro could go to par against the dollar sometime this year. However if the data flow starts to change and the Fed starts to hold off on a rate hike for this year then of course you will see the reverse but you have to watch the Fed. As long as the consensus calls for the Fed to tighten this year, the dollar will get stronger and of course the euro will get weaker.
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