David Kelly of JP Morgan Funds is doubtful whether the global sell-off is over yet. According to him, this global rout for the market is irrational though some profit taking is natural.
In an interview to CNBC-TV18, Kelly says the decline in crude prices is negative for Russia but oil importing countries are likely to benefit from the fall. He further elaborates that not too many countries depend on Russia for exports and its sell-off should, therefore, not change the global outlook.
Going ahead, Kelly expects markets to rebound when volatility dies down. He believes Europe will outperform once markets bounce back and could surprise on the upside.
Below is verbatim transcript of the interview:
Q: What sense are you getting about the sell-off both in crude in Russia as well as in global equities, at least in global equities is the big sell-off over?
A: We cannot tell. The global sell-off is a bit irrational in its scope. Of course the decline in crude oil prices is very negative for Russia and for other oil producers and it is not surprising to see the ruble under much threat but for developed countries and indeed for India, for oil importers, this is essentially a positive thing and uncertainty is affecting stock markets around the world but there are winners and losers here and those countries that import oil and now producers of oil, are winners from this.
Q: What are you attributing this sell-off or this extended or irrational sell-off to? Is it just year-end profit taking which has gotten a bit overdone or is there a genuine reassessment of growth over the next six months globally?
A: The first thing is right. We have had a good rally in United States equity markets and of course in Indian equity markets and some sell-off, some profit taking is very natural.
I know that there are some concerns that maybe falling oil prices are telling us that global economy is slowing down, but it looks like this is simply an inventory overhang and too much oil production around the world which has finally caused oil market to capitulate. I am not too much worried about the slowdown.
Q: What could be the snowball effect of the situation in Russia on other markets across the world? If there is some sort of debt default or some capital controls that are imposed then what could the effect be on other markets?
A: Russia on its own should not affect much. There aren’t many countries that depend upon Russia as an export market in neither a big way nor do global financial system is particularly exposed to Russia. But there are other countries that could be affected by this fall in oil prices like Mexico, Venezuela, Middle Eastern and there could be other casualties.
So far, it simply looks like a sell-off which should be centered in Russia and some other oil producers. I do not think it changes the outlook for global economic growth and because of that market will rebound once the volatility dies down.
Q: You do not expect any debt default from Russia to snowball and have a domino effect?
A: I do not believe it will have a domino effect on countries that are not as reliant on oil. No country wants to contemplate a debt defaulter of course and so most countries will be in a position to make sure that they continue to pay the sovereign debt and I expect that they will do so.
Q: The important statement you made is that the market will rebound when volatility dies down. When that takes place in 2015, which market will outperform or will be the best performing market at least in the first half of the year?
A: I do not think anybody should invest in stocks based on what is going to happen over the next six months. However, having said that, Europe is very well positioned, there is a lot of pessimism in Europe.
Europe is going to benefit from lower dollar, Europe is going to benefit from lower oil, Europe is going to benefit from lower interest rates and Europe is benefiting from less austerity.
There are lots of positives going on underneath the surface in Europe and it will grow faster. It doesn’t have the same debt hangover, the overhang that Japan does, they have some structural problems like China.
The Untied States will continue to pose positive numbers but if you are looking for a surprise over the next six months, it could be Europe.
Q: Are you already preparing your shopping basket at these unexpectedly lower levels or would you wait?
A: I try to be fully invested unless things are very expensive. I do not think global equities are expensive.
Q: Would India be a prominent member of your shopping list or generally fund shopping list after the volatility dies down?
A: The economic fundamentals are very good. India is succeeding in reducing its current account deficit and falling prices will help. India has good economic growth and it’s genuine.
There is a lot of long-term potential in India; it has good young population, a lot of investment spending. There are lots of positives but Indian stocks are not particularly cheap, so India would not be at the top of my list but I would certainly want to remain invested in India given the long-term growth story.