Oil can hit $80 and go far beyond: Arvind Sanger explain why

Europe for bad or worse is back in the news for all the wrong reasons, says Arvind Sanger of Geosphere Capital Management. Domestic as well as global factors are going to keep markets somewhat range bound and the best approach should be company specific, he advises. Sanger spoke to ET Now.Edited excerpts:Make sense of it all. Do you think the market is looking for reasons to really get scared and nervous at these levels because the Italian crisis and nothing about the Italian economy was new. They have had their own share of struggles, they have severe debt problems, the political situation has not been stable in Italy for a while, but suddenly the market got a whiff of how things may be destabilising there and sold off. How do you rationalise the market mood globally right now?Well, I think the markets have seen a difficult year in terms of breaking out of the range in the last few months and I think it has been a series of things that have set the market on edge. There has been fear of trade war originating from the US, then the oil price has moved up very sharply, central banks led by the Fed are raising interest rates, you have had currency blow ups in a few emerging markets -- Argentina, Turkey being two examples. Now, you have in Turkey an election that produced an outcome where you had two extreme left and extreme right euro skeptic parties that were trying to form a government. The concern was that euro scepticism could lead to some talk about them exiting from the euro. That is a long shot, but the reality is this is a market this year that is finding new reasons to worry and I think Italy gave another reason for nervousness because think about it, two months ago or a month and a half ago, Italy was borrowing at negative interest rates... What you had was a little bit of a whiff of fear which caused Italian spreads to blow out versus German bonds. So, yes, today we got in the US we got the markets rallying back, but I think that in the Italian situation, there will be probably another election in the next few months as this one does not look like it is forming a government. And I think the news from there could remain a little unsettling as Spain has a prime minister that could be facing a no-confidence vote. So, Europe for bad or worse is back in the news for all the wrong reasons. So that is another risk-off factor, that could look in the background for emerging markets investors as a risk factor. What is the right way of looking at the world right now because frankly there are just too many moving parts, there is strength in the dollar index, there is strong economic data which is coming out from emerging markets, there is potentially a fear of an economic and a political crisis in Europe, and when it comes to US President Donald Trump, no one knows what is coming next. So, how should one read into the world?I think this becomes a market in which one has to take a very bottom up company specific approach and then be patient for the right buying points. One thing that you can take away is the markets are not going to run away into some kind of an uncontrolled bull market. We will have rallies, we will have a few days and maybe a few weeks of everything look hunky dory, but the reality is the political risk and the headwinds from rising interest rates in the US are creating some currency headwinds certainly for emerging markets investors. And I think oil is a brief risk but I believe that Brent crude is headed back above $80 because the fundamentals of supply demand are not going to be significantly impacted by Opec raising production a little bit.Those are all factors which are going to keep markets overall in a somewhat range bound. But countries like India where bottom up earnings are improving, there should be over time an upward bias, but I think what you will get is a PE correction with a time correction more than big selloff unless something unexpectedly goes wrong. And I think one of the risks for India is that in this time leading up to an election, there should not be any policies that are investor unfriendly and that is one of the things that the government has to be careful about. There are a lot of moving parts going on about access for foreign investors to stocks. There is some rule change there, these kinds of rule changes have to be well thought through in terms of not creating any headwinds for foreign investors.How are you looking at the trend there, is oil likely to be capped at $80, is that the best that the market can do right now ahead of the Aramco IPO or ahead of the fact that Aramco is not going to hit the markets anytime soon before 2019 and what will be the impact for oil importing countries. You spoke about Turkey, but India as well is really in a bit of a tough spot managing rising oil prices?Well, first of all, I think it is an idea to think that oil prices are here because of Aramco. Oil prices are here because the global demand has been growing strongly and supply all over the world has been falling. Opec cut helped fix the overhang of inventory, but now as Opec comes back what we are finding is that oil prices have moved down. But if you look at 12 months, oil prices have not budged and that is because the curve which was backward area than downward sloping is now starting to flatten out because the recognition is that the supply demand dynamics once Opec comes back into the market in the nest 12-18 months looks quite balanced.Therefore there is not much downside on oil prices even as Opec comes back. So yes, as Opec comes back maybe prices stay constrained short-term, but I think two factors to watch out for are how rapidly does Venezuelan production continue to fall and what is the impact of the sanctions on Iran.There was some news about Reliance. India is one of the largest buyers of crude from Iran and I think there was some news that Reliance may be curtailing some of its Iranian crude purchases pursuant to the US sanctions starting to loom in the future. So, if Iranian volumes are impacted by that, it's going to be another factor that could cause oil prices to go back above $80 and move much higher from there.Right now, it is May 2018. Hypothetically if we are talking, let us say in May 2019, where do you think Indian markets would be and where do you think there is potential for a double-digit return? Well, I think, if you take Nifty and if you ask me where will it be, let us say by the end of this year going into calendar 2019, maybe the markets are 10 per centfrom here. But it will be pretty volatile between now and then. But as the earnings recovery may lead to PEs to shrink a little bit, the market should be able to move up over time. I think that would be probably the outcome, but keep in mind that going into 2019 we will be looking at an election and there seems to be a lot of nervousness right now about the likely outcome out of that election although I think most people are assuming that this government or BJP government will be formed again. But again, there is some risk there and there is some risk of how strong that government would be. So, the political uncertainties are another factor India specific which I think will keep markets from being too buoyant or having too much of a move other than the earnings recovery driven move, which will be the primary driver.

from The Economic Times https://ift.tt/2JhSHm1