Geoffrey Dennis says high oil prices and strong dollar continue to weigh on Indian Markets

India continues to struggle to find a catalyst for a sustained market recovery, with high crude oil prices and limited real interest rate support weighing on investor sentiment, says Geoffrey Dennis, Independent Emerging Markets Commentator. He warns that a stronger US dollar is putting emerging market fund flows under pressure, with some money moving towards developed markets and select oil-exporting economies.

Dennis believes emerging markets still have room to rise over the next five quarters, particularly in countries offering attractive interest rate support. He points to Brazil, Mexico and parts of Central Europe as markets with potential upside, while expecting the recent correction in South Korean and Taiwanese markets to have limited further downside.

[faq type="interview" title="This is an edited transcript of the interview."][ques][/ques][ans][/ans][/faq] [faq type="interview"][ques]Every bull market has a driver, and the driver of this bull market is artificial intelligence (AI). We've seen corrections in the past, including in the Korean markets, and we're in the midst of another one. As I highlighted, the market is about 37% off its recent record highs. What's the form and shape of this correction? Also, how do you view CXMT entering the domain of South Korean tech giants with a cheaper chip, and Broadcom likening AI investments to gambling?[/ques][ans]I wouldn't pay a lot of attention to the Broadcom comments, frankly, because we've heard all sorts of comments about a bubble, gambling, whatever you want to call it. Excuse my voice, by the way, but I think what's happening in the Korean market, and certainly in the Taiwanese market, but primarily in Korea, is just a correction from what was a very, very overbought situation. I was just running some numbers here, and Korea and Taiwan still account for more than 100% of the gains in emerging markets this year. So, they're still up a long way in dollar terms, and given how reasonably well the US tech sector has held up, obviously, you've had some sort of a correction. I doubt this move downwards in Korea and Taiwan is necessarily going to go a lot further because I have a lot of faith that eventually the US tech sector will begin to rally again.[/ans][/faq] [faq type="interview"][ques]As we mark four years of the US equity bull run, where do we go from here in emerging markets? What's the pecking order, and what is the working thesis? Crude prices continue to derail India's story.[/ques][ans]I think it's worth pointing out that the gap between emerging markets (EM) and developed markets (DM) so far this year has now shrunk to below 600 basis points and about six weeks ago, it was closer to 1,100 basis points. I think what's happening here is that the stronger dollar is beginning to have an impact on certain emerging markets, especially those that don't have a lot of interest rate carry. India is an example of that, given what's happened to inflation recently, despite the modest uptick in Indian interest rates. Overall, unless you get a further dramatic sell-off in the US market, I still think there's a lot of potential upside over the next, what should we say, five quarters in certain emerging markets that have a lot of interest rate carry and where there are reasons to buy. Good examples would be Brazil, given the potential election result in the second round at the end of October, as well as Mexico and parts of Central Europe. I think India, at the moment, is still—and I've said this so many times before—looking for a catalyst. Unfortunately, the drag on India continues to be the impact of high oil prices, given that India imports most of its oil. There's also now very little real interest rate protection if the dollar is going to remain strong.[/ans][/faq] [faq type="interview"][ques]FIIs are selling in a market like India. The Kospi has also done very well, as you said, although there has been some correction. But there have been sellers there as well. Where do you think all this money is going to go in terms of asset or equity market reallocation?[/ques][ans]I think some of it has clearly gone to other emerging markets. Brazil is a particularly good example because of what's going on there politically. But I also think there's been some movement as the dollar has strengthened. As the Fed gets going with higher interest rates, and I expect one more rate hike from the Fed before the end of the year—probably not at the next meeting, but at the meeting before the end of the year—that's giving the dollar a lot of support. The DXY, the dollar trade-weighted index, is at 4% now. That's a classic environment in which people pull money out of emerging markets, especially where there isn't much interest rate support. So, I think some of the money that has been in emerging markets is probably moving back towards developed markets, and particularly those where oil exports are important or where there is significant interest rate support, such as Brazil. This is a classic rising-dollar environment that puts emerging market flows under pressure, and I think we're seeing that now. In particular, I think India will continue to face weakness. China still looks very weak, and I wouldn't be chasing that. I also tend to believe the Korean and Taiwanese sell-off hasn't got much further to go.[/ans][/faq]

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