The risk off trade in global markets manifests from Greek political uncertainity and fear of Fed tightening rates in mid 2015, says Hans Goetti, CIO at Banque Internationale Luxembourg.Speaking to CNBC-TV18 about the correction in Indian equities, Goetti says it is part of consolidation for a market that has had a good run. But improving fundamentals make it an attractive destination for foreign investors, he says.With crude seeing fresh lows, global sentiment were hurt resulting in sell-off in European and Asian markets today. Goetti says Saudi Arabia is determined to keep market share in an oversupply situation, which is why oil prices will stay on the lower side.The demand situation has not deteriorated much, and there would be many countries, like India, benefitting from it. Indian crude basket has fallen by USD 2.92 to USD 51.53/bbl.
Below is the transcript of Hans Goetti\\'s interview with Anuj Singhal and Ekta Batra on CNBC-TV18. Anuj: It is quite a bit of mayhem for equity markets globally but more so for emerging and Asian markets. What is your sense, a good buying opportunity or warning of things to come in 2015? A: We are in a risk off mode globally right now and there are a few uncertainties. There is political uncertainty in the euro zone, Greece is making headlines again and the fact that Germany seems to be of the opinion that a Greece exit will be manageable spooks market a little bit. You also have other things for instance like the Fed on a tightening bias sometime in the middle of this year. The consensus expects the first rate hike by the Fed in the middle of the year so there is a bit of uncertainty because of that. At the moment we are seeing a risk off trade but we think this will be temporary.
Ekta: Wanted your sense in terms of Brent crude prices or oil prices in general. Where do you see a bottom, why isn’t a bottom being formed as yet? A: It depends on what Saudi Arabia is up to. Obviously they are hell-bent to keep their market share and what you have here in the oil market is really an over supply, it is not a lack of demand despite the fact that the global economy is relatively sluggish; but it is an over-supply rather than lack of demand. Where the bottom is it is hard to tell but what we can say is that you have winners and losers in this situation. The losers obviously are the oil producers like Russia, Iran, and Venezuela and on the other hand you have winners; you have the US consumer who benefits greatly from lower oil prices. Basically what happens, in the oil market is the equivalent of USD 100 tax cut for the US consumer. You have Japan, India that imports lot oil; they should be the beneficiaries. So, overall a lower oil price helps rather than hurts the global economy.
Anuj: At what point is India a buy for you? The market outperformed quite a bit last year. This year the start was good but today we have seen quite a bit of decline. Do you think Indian markets will underperform this year among the Asian peers? A: This year is probably a consolidation; India has had a very good run before and after the election. The fundamentals are certainly in place. What foreign investors want to see is reemergence of an investment cycle. There is going to be a positive undertone for India but we cannot rule out a consolidation for the next few months because a lot of the bad news has already been discounted. Ekta: Are foreign investors still investing as much as they did in the last year in debt markets in India? Is that a preferred play in terms of a strategy this year as well? A: I would think so. I think the foreign money inflow will continue. Foreign investors like what they see in India in principle and we think that capital inflow will continue. What you have here is let us say negative sentiment towards emerging markets in general, the high dollar, the strength of the dollar is something that works against emerging markets; but we think that will be overcomed. If you make a distinction within emerging markets, India remains one of the more attractive one.
Anuj: We have seen the US bond yields drop to 2 percent, we have seen the dollar index go to 91. Do you think there is a real risk that this year with the kind of risk-off that we have seen, is there a likelihood of a 2008 kind of situation playing out, it does sound a bit extreme right now but is there a risk like that for global equity markets?A: We think the risk is relatively low because you have central banks all over the world still in expansionary mode except for the Fed which has not tightened yet but is just talking about it. Historically, equity bull markets were usually continuing after the first interest rate increase between nine and 12 months and the problems started in the second half of the tightening cycle. Basically once the yield curve starts to invert or when you are on the onset of recession and we don’t see that for 2015.Anything like this will probably at the very earliest be the case in 2016, more likely in 2017. So, even if the Fed tightens we don’t think the bull market will end. Also bear in mind that we have the ECB, we have the Bank of Japan which was still very expansionary so overall the positive undertone for equities will continue throughout the year.Ekta: I wanted to ask you the key one risk you think global equities face or the biggest risk you think in the next three months?A: I think it will again come from central banks let us say the Fed tightening too early or too much or against the backdrop of a weakening economy; that is a possibility. Then you have all the political risks which are known but we are not so worried about the risks which are known. We are more worried about the risks which are not known. I think central banks will still hold the key in this cycle and anything negative could come from that side.
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