Oil near bottom; valuations in India reasonable: Mark Matthews


Crude oil prices surged after a report indicated that Organization of the Petroleum Exporting Countries (OPEC) may soon discuss a 5 percent output cut with Russia to boost oil prices. Both Venezuela and Russia are calling for an emergency OPEC meeting, says Mark Matthews of Bank Julius Baer & Co. Speaking to CNBC-TV18, Matthews says oil could make a bottom at current levels as the oil cartel’s 12 member countries cannot continue producing. As far as the Indian equity markets, he says no improvement in government spending and stagnant reforms are the key reasons why foreign investors are selling. However, he believes valuations in India are not expensive. Further, Matthews believes banks will be able to reduce lending rates by April. Meanwhile, he does not expect a credit risk in the markets. However, central banks have a tendency to surprise on policy front, Matthews adds. Below is the verbatim transcript of Mark Matthews’ interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18. Latha: How should we approach this supposed suppliers’ pact in oil? Is that going to put a bottom to this emerging market fall at all? A: I think so but just to clarify that Organization of the Petroleum Exporting Countries (OPEC) has not agreed to meet Russia over a reducing supply. So there is no pact but I think it comes in the wake of Venezuela and Russia both calling for an emergency OPEC meeting and in spike in defaults in the US energy space and so what we are starting to see at this price is people just cannot keep continue producing. I don’t know where in the world it is going to be the first to give — Russia or Latin America or the Middle East or in North America but I think somewhere maybe at multiple places in the world, supply is going to start to come down and therefore I believe oil is putting in a bottom and we did see the low at USD 27 per barrel. Sonia: We were just discussing how we have had a string of weak earnings coming from many of the largecaps in our markets whether it is ICICI Bank, whether it is Maruti. I know you are a keen India observer, how have you read into the earning season and how would you approach India now? A: I have been preoccupied with a bit of travelling and I haven’t watched the Indian market but I would just say that I see two good things and one bad thing. So the one bad thing is that because the government is not spending a lot of money, businesses are not particularly interested in investing. So that is the bad thing. However, the good thing is that the price earnings ratio in India on 15 times is not that expensive and I also think that come April, banks will be able to reduce their lending rates and that is always good for an economy. So I put it together, I see a picture that is modestly positive but the problem with India — as we all know — is that it is foreign investors who tend to drive the direction of the market and there is a very long shadow being cast over all stock markets in the world by the Standard & Poor’s (S&P) index. So as long as the S&P is going down, it tends to take everybody else with it. Latha: How do you see global markets trending? Even developed markets — we just got this warning from CLSA and everyone has been talking about it, the potential problem with high yield bonds, many of them are coming up for redemption and energy related bonds are particularly likely to default, is there a big credit risk, credit default waiting to happen that can take the markets down? A: I think if oil went to USD 22 per barrel, yes but I don’t think it will. I think that it is pretty at the bottom in the high 20s because once you get around USD 27 per barrel, so few people make money. The average production cost in the world is somewhere around USD 40-50 per barrel. So you can imagine down here at USD 33 per barrel, nobody is making money but down to USD 27 per barrel, even less. It is ironic but that spike in the defaults and in the high yield space in the US is a positive thing in the sense that it is telling us there will be less supply of oil in the US in the future. Therefore that will help bring down the supply and put in a base for the oil price. In the first 21 days of this year — I read this on CNBC website yesterday — the correlation of the stock market and oil has been the highest ever. I think it is 91 percent in the first 20 trading days of this year. So the oil price is what we all wake up in the morning now and look at — just like a year ago, we all woke up in the morning and looked at Greece and then the second half of last year we all were wondering what was going to happen to the Shanghai stock market, now the focus is on oil so if oil can put in a bottom here, that is very good. However, we still have a couple of other outstanding issues and one big one is the renminbi. I still feel like the equity market is kind of waiting and looking at a volcanic mountain which is spouting fumes, it might explode. So we don’t know is the renminbi is bottoming here, is the oil price bottoming here? Therefore I got the feeling that the markets are going to remain fairly on the defensive side. Latha: What are you expecting from the Bank of Japan (BoJ), if they were to print more yen, are we going to see a temporary reprieve? A: They meet today and market is not looking for them to do anything better. There are three major central banks that do have the greatest tendency to surprise so they could come out with more QE but they did it in December and the amount that they did was simply not enough to excite the market and of course the yen strengthens since then. So I think even if they do slightly adjust some of the programme, I doubt it will be substantial enough to cause the markets to react very much and in fact in the last meeting in December, there were three out of the nine board members at the BoJ who were in disagreement with doing further stimulus then. There are economies doing very well, they don’t need to do more.