Indian markets best in terms of earnings momentum, price revision
January, 09th 2015
Let me just first ask you: the kind of volatile trade setup that the year has started with, the global markets were looking extremely shaky two or three days back because of oil and the Greek fears and suddenly those worries seem to have been thrown out of the window by virtue of what the FED has said as well as the and hopes of a QE from the EU region as well, even though how unlikely it looks right now.
Markus Rosgen: In terms of the way we look at the markets, we think people are a little overly concerned about what is happening to the price of oil. Obviously if you are an oil exporter, the news on the oil price is not good for you. But if you are an oil importer or a large consumer of oil, the decline in the price is obviously good. So interestingly, whilst everyone is quite concerned, our economists both in the US and in Europe have actually been increasing the GDP growth forecast both for this year and next year on the back of the kind of tailwinds that you are going to get from lower oil prices. Some people believe that the price of oil is going down because of weaker growth, while other people believe it is a case of excess supply, not a growth fear and so the market is just trying to come to terms which way it is going to go.
ET Now: With the ongoing Greek crisis then, what is the sense that you are getting about what the ECB decision is going to be at the month-end, given that the region is already suffering with deflation?
Markus Rosgen: Our view is that we will get a European QE. So that is definitely happening. The additional weight and the CPI numbers and the views in terms of Greece continue to be that Greece will not leave the euro but clearly down the road if you look at the Greek debt levels, there will have to be discussions on the restructuring of those debt levels. Again, that is nothing out of the ordinary, but in terms of Europe, certainly QE is going to happen for sure.
ET Now: How are you playing the global setup right now? Are you playing contrarian or are you going with the tried and tested, some of the promising emerging markets in the Asian region or some of the global developed markets?
Markus Rosgen: The last thing that you ever want to do as a contrarian is bet against the last year's winners and historically at least since the 1990s, that has never proven to be a great success as a strategy. So I would not advocate anyone doing that. What we are looking to do in terms of global emerging markets is we were overweight Asia last year, we are still overweight Asia relative to both EMEA and Latin America. The key reasons behind it are that Asia offers better value and better earnings revisions than the other two and obviously, it is the single biggest winner in terms of the EM from what we are seeing in terms of both lower oil and lower commodity prices. We are an importer of it. So it has a positive impact on profits, positive impact on also government finances. Whereas if you are Latin America or EMEA where you have a much bigger weighting of commodities or the stock market, you are the loser of what is going on. So we are positive in terms of trade for Asia and mixed in terms of trade for the other two. Better valuations and better earnings revisions is going to help sustain the markets in Asia over 2015.
ET Now: So within the Asia emerging market basket, where would you place India because India partially does stand to benefit from the crude cool off?
Markus Rosgen: If you look at India, relative to all other emerging markets, it is now beginning to look expensive. But in terms of combination of both price momentum and earnings revision, it ranks the best in the whole of EM. When you combine the two, you have got a rather attractive proposition. 2015 for India is going to be the year where earnings and reforms are really going to have to come through. A lot of investors, in particular foreigners, bought India last year on expectations of a quicker reform process, a deeper reform process and interestingly when speaking to clients, everyone is getting a little bit worried that the momentum there has not been quite strong as people expected. So, that is going to be the key to kind of sustain it. If you are a value investor, then India is starting to create some headache for you.
ET Now: What is your take on the commodity price deflation that we have seen? Gold has shown a bit of an uptick as well, maybe safe haven demand, but what about crude and can the geopolitical or the demand supply-led pressure on crude take it further downward?
Markus Rosgen: The view on crude that we have is that it has not been a demand issue. So it is not that global growth is falling off the cliff. What has happened is obviously you have had new oil finds and that has led to an excess supply of crude and hence driven down prices. Longer term, we are still in these kinds of 65 to 75 range of crude. So clearly for the moment, the effort is a little bit oversold and it is interesting if you are looking at it from a sector allocation point of view, value is beginning to emerge in the energy space. Obviously earning revisions currently look terrible in that area. So longer term, there is certainly value there. Near term, the momentum is still kind of down rather than up, but the value investors are beginning to have a look at this sector. It is very under owned, it is very much a consensus underweight across the whole of EM and so it is something that people are beginning to think, well, I would be underweight, it has been the right thing, but if value is beginning to emerge, should we start to nibble a little bit at the sector? That is going to be the move for a lot of people going forward.