Crude in $70-80-range best for India, not crashing prices: Arvind Sanger

Arvind Sanger, Founder & Managing Partner, Geosphere Capital Management, says India benefits from moderate crude prices, but it does not benefit when crude prices are showing weakness because there are concerns about global recession. So you should be careful what you wish for. You do not want crude to be crashing to a level that would suggest that global economies are in a concerted fashion going through a major slowdown. If crude stays moderate in the $70-80 range but does not meaningfully roll over, that would be probably the best outcome from an Indian standpoint.


What are you making of the global market construct right now? Do you think what we saw on Monday, Tuesday, and Wednesday was just a little bit of a knee-jerk reaction or an aberration in an otherwise intact bull market or do you think the global demand concerns are hinting towards maybe a slowdown across?
Arvind Sanger: The news from China has been bad for a while and keeps getting weaker and weaker. So, the Chinese news is certainly not encouraging. But on the US data, we got maybe a little bit more optimistic in the later part of August that maybe we might be able to engineer a soft landing in the US economy. The employment data this week is again, casting some nervous doubts about whether there is a risk that we could have a hard landing in the economy. So, the probability of a 50 bps in the Fed meeting two weeks from now has now gone up to 40%.


There is a 100% expectation that there will be a 25 bps cut and an additional 40% expectation that it might be a 50 bps cut. The markets are getting a little bit nervous and maybe a little optimistic that the Fed will take a more aggressive stance to try to minimise any slowdown impact. So, the markets are a little nervous and maybe markets might stay range bound to put a little more pressure on the Fed to do more.

I do not think the markets are going to run away from us. Although there is an important unemployment number that came out a month ago at 4.3% and comes out tomorrow morning our time, and the consensus is 4.2%, there is nervousness that maybe it is 4.3% or higher, which will continue to keep pressure on the market.

The expectation is from the August non-farm payrolls report, because that will have a bit of a bearing on the Federal Reserve's approach and how you are reading into that.
Arvind Sanger: I think that is going to be the one that we are going to be watching out closely and we are in the nervous camp of believing that the risk of getting a negative surprise is not insignificant. The biggest challenge is going to be non-farm payroll numbers. The unemployment rate also comes out at the same time and that is going to be an important one. We have to see if the non-farm payroll numbers are disappointingly low or if the unemployment is back at 4.3% or higher. Then the recession talk is going to get even more fuel to the fire.

We have no confidence either way, but we will be watching that closely to see how much of a risk-on markets are going to be willing to take. I guess that we are not going to get anything dramatic either way, but the risks are to the downside in my opinion. Therefore, we are cautious going into it and we will watch to see and obviously, that will have an effect on Fed policy also.

In light of all of that, while India has showcased remarkable resilience, I just wanted to understand because some of the macro indicators seem to be slowing down here as well. The case in point is passenger vehicles or some of the other consumer durables data, etc.
Arvind Sanger: It is not like the Indian economy is accelerating. The GDP numbers showed lower numbers than the last two GDP numbers. So, the GDP in the high sixes, it is good. It is one of the best in the world, but it is not accelerating. And if you look at some of the other data, it is quite mixed. So, I think the Indian economy is maybe growth moderating a little bit, which is not surprising because India is not an island that is independent of what is going on with global demand and exports.

So, India benefits from lower oil prices, and lower commodity prices – to the extent that it is an importer – are positives for India. But to the extent that India is now becoming export-oriented in some of its electronics, some of the areas that it is trying to grow, it is important that people do not take that eye off the ball that India also has elements of its economy that are dependent on exports and the Indian economy on its own. Auto sale numbers and others are not exactly ramping in a meaningful way. I do not think India is in a bad situation. It is just that I do not think it is accelerating to where the investors can say that India is an island and we do not have to worry about anything that is going on globally.

A big talking point is the way crude oil prices are shaping up. You spoke a little bit right now, of course, about the Indian markets, but how would you look at the crude oil price movement in the context of the Indian markets and where you see them headed?
Arvind Sanger: Indian markets do well when global growth is good and crude oil is moderately heading higher. It may not do great when oil prices shoot up too much. But to the extent that crude is an indication of global demand growth and India does not do well when the world goes into a recession and crude oil prices crash.

So the idea that India is somewhat negatively correlated to crude is just not true. It benefits from moderate crude prices, but it does not benefit when crude prices are showing weakness because there are concerns about global recession. So you should be careful what you wish for. You do not want crude to be crashing to a level that would suggest that global economies are in a concerted fashion going through a major slowdown. If crude stays moderate in the $70-80 range but does not meaningfully roll over, that would be probably the best outcome from an Indian standpoint.