In an interview to CNBC-TV18, Shane Lee Director, Economist & Strategist-Equity Research, CIMB says the expectations around India's growth is worrisome since the only way it can pick up is through investments, which at the moment looks sluggish. Lee says he is overweight on financials and consumer discretionaries in India but underweight on cement. However, he says Indian equities may not repeat the tops achieved last year.
Meanwhile, China's manufacturing sector remained in a poor state in January amid increasing speculation that policymakers will intervene with fresh measures to spur the economy. Lee says slowdown in Chinese growth shows the economy needs help. He expects the People’s Bank of China (PBoC) to step in around Chinese New Year with an interest rate cut
Speaking about US market, Lee said the US GDP numbers may force the Fed to push back its interest rate raising programme. However, a lot of capital flew into US bond market over the last few weeks.
Below is the transcript of Shane Lee's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Latha: The most recent gross domestic product (GDP) data from the US - how would you analyse that in terms of Fed rate hikes. Does that get pushed back even further? A: We should expect that in the Q4. We saw weak growth and what we saw in Q3, it was 5 percent, so I do not think that’s any surprise. There has been little bit of slowdown. Some of the weakness in GDP was through in areas like net exports and we haven’t yet got the full trade data for December. There is a prospect that it’s revised up a bit but I do not think there is any implications for the Fed out of that. I think they would have expected that. For the Fed, it is more important what happens in the labour market particularly wage developments over the next few months and how underlying inflation or core inflation begins to slow over the next few months with decline in the oil price fading through and where it finishes up. If it comes out of that slowdown due to the oil price with the momentum that it had prior to the oil price movement, then the Fed is still on track to start raising interest rates in the middle of the year.
Sonia: In Asia we have seen a big fall in the Chinese market today on account of the Purchasing Managers’ Index (PMI) data. Would you be concerned about the growth slowdown that we are seeing in Asia and what would your view be on markets like India, who have been at the other end of the spectrum? A: With China and the PMI data, our view is that the Chinese growth is definitely slowing, so we do expect a bit of weakness there and generally the policy agenda for the People’s Bank of China (PBoC) this year is to manage growth down. So we do expect growth still to slow but we expect also the PBoC to step in around Chinese New Year with further interest rate cut and cut possibly to the reserve requirements ratio.
Latha: Is there a danger to flows into equity markets, the European tap is now fully open. Do you think inspite of somewhat occasional weak numbers, we should expect the flow into equities to be good? A: I think so, generally bonds at the moment particularly over the last few weeks have seen a lot of capital flow into US treasury market, It has seen a lot of capital coming from China and bond markets like Europe and Japan pretty much supported by the actions of the central banks in those particular areas. So the bond markets by any fundamental analysis looks expensive, the cost of capital is low, so generally that should keep equities well supported as well. For equities, it comes back down to earnings, so what we have seen in the US reporting season at the moment is some impact from the stronger US dollar and in other parts of the world where we have seen the opposite of that, so Australia for example, where we are seeing early signs of the currency starting to benefit some of the trade export sectors in this country right now. Latha: What would be your pecking order for equity markets and where would India figure, does it look fully valued or does it look like it still has space to rise? A: We think there is a bit of upside but the market had such a good run, last year it was up around 30 percent, so I do not expect those tops to be repeated again. We have got a target of around 5,500 on the Nifty, so there is a bit more upside to come. The issues that sort of worries us a bit about India is that there is some positive expectations building for growth. The consensus for this year is around 5.5 percent, for next year 6.5 and then 7 percent in 2017. We think the only way you can achieve that is through a pick up in investment and we think that is maybe little bit more sluggish than what the market anticipate. So, in terms of sector calls on the Indian market, we are overweight financials and consumer discretionary, underweight cement industrials. Sonia: Your views on crude because last week we saw a major bump-up in crude, in fact on Friday crude was up 8 percent on the back of a sharp drop in US drilling. Do you think crude prices will recover this year? A: It’s already been a fairly big adjustment so we must be getting towards the bottom now but I wouldn’t discount further downside. A lot of the commodities at the moment particularly iron ore, there are supply issues, there are supply issues in oil and the supply side adjustments tend to take a while, so I wouldn’t discount further price declines but must be getting towards bottom fairly soon.
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