Mumbai: The recent rally in Indian markets, part of an Asia-wide trend, could extend another 10% from current levels, says Mark Matthews, Merrill Lynch and Co. Inc.’s Hong Kong-based head of Asia Pacific equity strategy. The rally has been fuelled by a correction in global crude oil prices after a record rise.
He says smart money has started flowing back to equities from commodities, and expects the trend to pick up in the short term.
There are many takers for Matthew’s view. In an end-July research report, US investment bank Lehman Brothers Holdings Inc. predicted oil prices will continue to ease, aided by deteriorating demand. Lehman expects oil prices to average $110 (Rs4,664) per barrel during the fourth quarter of calendar year 2008 and $90 in the first quarter of 2009.
No respite: Mark Matthews, chief Asia equity strategist, Merrill Lynch. (Photo: Abhijit Bhatlekar / Mint)
“Few months ago, US investment banks were estimating oil prices at $200, now more people are talking of correction,” notes Paul Parambi, head of international business for Indian private sector lender Kotak Mahindra Bank Ltd. “This is a good thing. We may not see oil prices heading back to its record levels,” he said. Parambi’s team manages and advises about $2 billion worth of Indian equity portfolio for a set of foreign institutional investors including Kotak’s off-shore funds.
In an interview with Mint, Matthews aired his views on Indian and Asian equity markets, macroeconomic estimates, the direction and impact of oil prices, and where India stands among other portfolio markets in Asia. Edited excerpts:
Key Asian indices have seen a bear rally since mid-July. Why do you expect it to stretch?
We have already seen the worst case in oil prices, growth estimates, geopolitical tensions, etc. If we look at the standard deviation from the 200-day moving average, it indicates stocks could rally further. The volatility in equity markets have also come down. We expect more money to flow into Asian equities if the dollar stops falling and oil remains less expensive.
What is the most important factor that reversed the direction of oil prices?
There was large amount of money flowing from equities to commodities, mainly oil. However, a large part of the big spurt in oil price was based on political risks. With the tensions between US and Iran subsiding, it has cooled off.
You are underweight on India; do you expect an upgrade if oil prices keep moving down?
We are 70 basis points underweight on India (one basis point is one-hundredth of a percentage point). The rising oil had most hurt two Asian economies—India and the Philippines. So the correction in oil prices should most benefit these two economies. We expect strong growth in India, despite the headwinds. However, Indian equities are still highly priced compared with many other markets. Our weightage is based on various factors, including economic growth forecast, earnings estimate, returns from the market and forex gains.
Which Asian markets are you most bullish on?
We are overweight on Thailand, China and Indonesia. We believe Indonesia is a hidden gem, rich in natural resources. It is a good market to play the commodity boom. Although we expect oil prices to move their way down, the wider commodity boom could continue. However, we do expect a rally across Asian markets in the near term. The only exception may be Vietnam, which has fallen the most this year, because of a real crisis.
Will there be more fund outflows from Indian equities?
If you look at Asian markets, only Bangladesh and Sri Lanka have withstood the heavy fall. This is because foreign funds have almost zero exposure to these markets. So there were no sellers. Compared with other Asian and emerging markets, Indian equities were over-owned. Some of this has already moved out this year. There may not be a lot of outflow, going ahead.