'It's consolidation time, we may not see a further slide'
Indian market is in a consolidation phase which is good. It’s just the capital market that is seeing a realignment of funds. Day in Pics
By Deeptha Rajkumar, TNN |
The overweight position on India has been reduced, and from a net flow perspective, in emerging markets, the beneficiaries have been Thailand, Taiwan and Pakistan, says Stuart Smythe, ED, head-equities, Macquarie Capital Securities. In conversation with ET, Mr Smythe spoke of how a volatile currency, inflation, the possibility of political change plus the changing regulatory landscape in a de-risking environment all add up to a reasonably benign outlook on India.
Where do you think the market is right now and where is it headed?
I think, you will see the market remain relatively benign. There is a confluence of upcoming factors that is likely to impact direction. One, very high inflation, which looks like it���s going to get close to double digit, and two, without question a GDP growth scenario which is going to slow. Now, the mechanisms by which you control inflation and GDP don���t always work in tandem. Emerging markets typically dislike three things ��� volatile currency, inflation risks and possibility of a changing political landscape. The only three markets, which are close to positive in the entire region, are Pakistan, Thailand and Taiwan. So, while India has these things in the pipeline for the next 9-12 months, I don���t think you are going to see any huge level of out performance coming to play.
So, does that mean we are in a bear market?
No, I don���t think we are in a bear market. I think we are in a consolidation phase which is good. If the economy slows down by 100 bps, everyone gets space to breathe. So, I am not particularly concerned. We are still talking 7-8% growth. In Europe and the US, you barely have 1-2% growth, so you are still talking very strong growth. It���s just the capital market that is seeing a realignment of funds. You are seeing a derating or derisking of flow.
Are there continuing concerns about India. What���s the sense you get from institutional investors? Are they still not happy here?
India has, since the last election, put in place a stable framework that coincided with a belief that India was going to become equivalent to China or was the next China. So, the socio-political environment and the tremendous reforms in the financial markets helped India remain in the sweet spot for emerging market inflows. Nothing has changed fundamentally within India in the current climate from a market���s perspective with the exception of change in the P-note structure and changing regulatory environment. The people who believed in the India story are still there, but just may not be coming in with more flow. Currently, on a historical basis, we are revisiting 12-month lows. So, we may not see further downside. If there are nasty surprises or disappointments as we have seen with BHEL, we will see another leg down in 5% range. You have extremely strong support for the Nifty at 4,200 level and below 15,000 on the Sensex.
How are markets dealing with inflation and your stance on interest rate-sensitive sectors?
When do you see a recovery in risk appetite and when do you see the comeback happening?
You will start to see it in the fourth quarter of this calendar year. By which time most of the noise regarding currency and inflation will be out of the way. We would also know by then whether the global credit crisis is in for its second leg down. If it goes to a trillion (as is being said), it will have follow on implications for the next level of credit. Once there is complete transparency on the credit crisis, we expect to see a recovery. If the US manages to extract a soft landing, this is the best case scenario. If, however, it���s in for a hard landing, then the fourth quarter recovery will be delayed.
Where do you think the market is right now and where is it headed?
I think, you will see the market remain relatively benign. There is a confluence of upcoming factors that is likely to impact direction. One, very high inflation, which looks like it���s going to get close to double digit, and two, without question a GDP growth scenario which is going to slow. Now, the mechanisms by which you control inflation and GDP don���t always work in tandem. Emerging markets typically dislike three things ��� volatile currency, inflation risks and possibility of a changing political landscape. The only three markets, which are close to positive in the entire region, are Pakistan, Thailand and Taiwan. So, while India has these things in the pipeline for the next 9-12 months, I don���t think you are going to see any huge level of out performance coming to play.
So, does that mean we are in a bear market?
No, I don���t think we are in a bear market. I think we are in a consolidation phase which is good. If the economy slows down by 100 bps, everyone gets space to breathe. So, I am not particularly concerned. We are still talking 7-8% growth. In Europe and the US, you barely have 1-2% growth, so you are still talking very strong growth. It���s just the capital market that is seeing a realignment of funds. You are seeing a derating or derisking of flow.
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Are there continuing concerns about India. What���s the sense you get from institutional investors? Are they still not happy here?
India has, since the last election, put in place a stable framework that coincided with a belief that India was going to become equivalent to China or was the next China. So, the socio-political environment and the tremendous reforms in the financial markets helped India remain in the sweet spot for emerging market inflows. Nothing has changed fundamentally within India in the current climate from a market���s perspective with the exception of change in the P-note structure and changing regulatory environment. The people who believed in the India story are still there, but just may not be coming in with more flow. Currently, on a historical basis, we are revisiting 12-month lows. So, we may not see further downside. If there are nasty surprises or disappointments as we have seen with BHEL, we will see another leg down in 5% range. You have extremely strong support for the Nifty at 4,200 level and below 15,000 on the Sensex.
How are markets dealing with inflation and your stance on interest rate-sensitive sectors?
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On inflation, we haven���t seen a top out yet, it will go higher possibly, double digit. There is not going to be a moderation in food price inflation. You are going to see food price inflation continue to kick through. As such ���ag-flation��� is here for the foreseeable future. That is a major contributor to the WPI here. Markets essentially will de-risk. Anything that is speculative or overweight will be reduced. We also haven���t seen the shorts on global financials come off yet. You have seen short-covering here definitely on Indian financials because you are in a rising interest rate environment. This is good for banks whose profitability will be stronger. They are going to outperform but selectively. We are positive on Axis and HDFC. When do you see a recovery in risk appetite and when do you see the comeback happening?
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You will start to see it in the fourth quarter of this calendar year. By which time most of the noise regarding currency and inflation will be out of the way. We would also know by then whether the global credit crisis is in for its second leg down. If it goes to a trillion (as is being said), it will have follow on implications for the next level of credit. Once there is complete transparency on the credit crisis, we expect to see a recovery. If the US manages to extract a soft landing, this is the best case scenario. If, however, it���s in for a hard landing, then the fourth quarter recovery will be delayed.
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