He discussed about oil prices, commodities, emerging markets, developed markets and the geopolitical situation with risks in the middle east.
Here's the transcript of the interview:
Q: What have you made on the underperformance in emerging markets (EMs) so far? Is it now beginning to look like a crowded trade — this EM versus developed markets debate?
A: We had a massive outperformance of emerging economies’ stock markets between 2003 and a few months ago vis-à-vis the US. The investors who were by and large overweight emerging stock markets and underweight the US — they are still underweight the US. When the talk about inflation came up — I am not saying it is justified or not — it gave investors an excuse to sell down their holdings in emerging markets and move some money back into the US.
Q: Do you see most of that trade as having played out or do you think emerging markets have not bottomed out yet?
A: I don’t think that emerging markets have bottomed out but it would be now late to sell emerging markets. In many cases, they are down 20% and many stocks, good companies, are down 30% from the recent high. The US stock market has now doubled from its low.
In other words, there are only three occasions in the last hundred years when the stock market in the US doubled within two years. One was in 1934, coming off very deeply oversold condition in 1932 and the other one was in 1937. After 1937 and 1934, the 12 months return, both were negative.
I would be a little bit careful here to just buy the US because investor sentiment is very positive. The volume has been relatively sluggish and the market is extremely overbought by any statistical model.
Q: What about India? If your call is that emerging markets have not bottomed yet, what would you do with India at 18,000 Sensex? What downside do you see here?
A: I was interviewed not long ago, where I said that downside is around 15,000. But many things can happen in the world. Investors have been very complacent about the events in the Middle East.
I am not suggesting that it will necessarily spread to the Emirates to Qatar and to Saudi Arabia but there is always a possibility of some further bad news coming out of the Middle East, which would then, in my opinion, drive up oil prices. Obviously, rising energy prices would be a negative for the global economy — for the US economy and also for India.
Q: What kind of upside risk would you say exist for crude prices themselves?
A: On the upside, if you look at some other commodities like copper, then obviously oil prices could go up substantially even from these levels. I don’t think that oil is expensive compared to other commodities or compared to other goods prices in the world. But that would obviously depend on some political problems — some interruptions in oil supplies or a possibility of the global economy experiencing some kind of a crackup boom. A crackup boom is a boom that is driven by artificially low interest rates, easy monetary policies and debt growth.
The private sector debt growth has slowed down but it has turned up again. At the same time we have, of course, a huge expansion in government debt. That should not be forgotten.
These crackup booms don’t last. They are not sustainable but they can last six months to one year to 18 months and then a renewed setback occurs in the global economy.
Q: At what point would you consider the fact that emerging markets at any rate may be in a bear market now and not just a running correction in the bullish phase?
A: Whenever a market turns down after extended uptrend, you don’t know for sure whether this is the beginning of the bear market or whether it is just the correction in an uptrend. My impression is that if correction could last somewhat longer — then we will have to watch a rebound whether the rebounds can bring new highs or not. If it fails to bring in new highs, the likelihood of a bear market than manifesting itself is quite high.
Q: But if you look out six-nine months, do you see global markets moving in this kind of opposite directions? For instance in the last few months, it has been in opposite directions. The developed markets have moved in one direction and emerging markets in another. Do you see any synchronous movements happening sometime late in 2011 or do you think it will be one versus the other?
A: My view is that the US market will eventually join the emerging markets on the downside because if you take a bearish view about emerging economies, you cannot be too optimistic about the US because for many US corporations, 50% or more of their profits come from emerging economies. My main concerns are these: first of all, I think that not all is well in China. That if the Chinese economy slows down more then what analysts expect, we could have a downdraft in commodity prices and all the warrants on China — whether it is Brazil, Australia or Indonesia — would get hit quite hard.
Secondly, I think that the geopolitical tensions in the world are increasing. In particular, if I were in India, I would be concerned about the events that are now occurring in Pakistan and Afghanistan. This can also have an impact, obviously, on the valuation of equities. We shouldn’t forget that all the central banks in the world basically only know one thing and that is to print money. When things will get bad, they will print more money. If they get worst than bad, they will print more money.
Independently, whether that is the Bank of China or the Reserve Bank of India (RBI) or in the US — all the central banks will keep interest rates artificially low and they won’t increase them to a level where inflation adjusted they are positive.
I would be very concerned about the bonds market.
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