There may not be any long-term positive impact from demonetisation, says Arvind Sanger, Geosphere Capital in an interview with CNBC-TV18. It will only lead to a postponement of earnings recovery.
The pain will continue well into the March quarter of current fiscal, says Sanger.
OPEC in its meeting yesterday, agreed to cut output after 8 years. This will lead to a long term positive for crude price. It may be positive for oil producing nations like Russia, but will be a negative for importers like India and China.
Crude price rise and other global cues may hamper RBI's ability to cut rates, he says. He also does not see the Indian market rally due to the global pressures.
Sanger says US market is liking the pro US growth story under Trump administration. US traders see taxes being cut. They also expect less regulatory burden due to Donald Trump winning the US elections, which they view as a huge positive for the market.
He sees the Indian IT sector doing very well under Trump's presidency. He says despite the uncertainty around H1B visas, the IT companies stand to gain.Below is the verbatim transcript of Arvind Sanger's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: The crude output cut -- how would you see it playing out? Will it be emerging market (EM) positive but negative India?
A: Crude output cut itself is positive for those emerging markets that are large crude producers, certainly Russia is a big beneficiary. Some of the countries obviously in the Middle East and some of the African producers are being beneficiaries. However, if you look at major emerging markets like India or China, they are crude importers. So they are at the margin -- everything else is being equal, negatively affected because this is not crude rising because demand is strong in which case markets go up along with crude prices. This is crude going up because OPEC countries are cutting supply and that is just a transfer from oil consuming countries to oil producing countries. So in that sense it is a negative for any big oil importer and India is certainly a loser in that.
Oil prices are still at USD 50 per barrel. So as long as it stays relatively contained, it is not going to be that big a deal but the problem is that oil has gone up, other commodities have gone up, dollar has gone up and US bond market is indicating that the Fed is going to be much more aggressive not just in the upcoming rate decision in a couple of weeks but maybe several times in 2017. So that to me is a bigger headwind than just a pure oil.Sonia: I wanted your reaction on how the Indian markets have taken the demonetisation because now the Nifty has recovered more than half of what it lost since the demonetisation day and is back above 8,200. Do you think the worst of that impact is now behind us?
A: It is hard to tell because clearly we don’t know how bad things will be in the second half of the December quarter after the effect of demonetisation hit on November 8 and so the bad is still to come. I think the effect will also continue in the March quarter so you got one and a half quarters of the meaningful impact on gross domestic product (GDP), which is right now there is a lot of theories and a lot of conjecture but it is going to have a negative impact.
The market is trying to come to terms with -- is this a onetime hit for three-six months and after that we are back on track or is this a onetime hit and then things are better than they were before, which is a bull case or is this a onetime hit that continues beyond two quarters and we remain in the somewhat more cautious camp that it is a two quarter hit, we don’t see any meaningful positive long-term effect although we stick to the political benefits to the government will be there but economically we think it is a postponement of the earnings recovery.Latha: I want to come back to the domestic themes in a minute but something big happened at your end as well, we saw Wilbur Ross being appointed to the cabinet, not surprised of course, we had the interview and we will be playing that out, we had an exclusive chat with him on CNBC and the key takeaways were that middle class taxes are going to get cut, the rich will not see too much of a reduction in taxes and the transpacific treaty is clearly out -- these were some of the key takeaways that we got and they believe the Volcker rule is simply too crimping, banks are more interested in compliance than in giving out loans so that looks like definitely something they will go after, so how should we interpret it as a stock investor in Indian equities?
A: It sounds like people who are in charge of the economic policy are pretty much from what was euphemistically referred to as the establishment of republicans in a sense with Trump's overlay, there is going to be a tax cut, there is going to be less regulation, there is a steeper yield curve so financials are certainly doing very well as I see it but the commodities markets leaving oil aside have had a big rally partly fuelled by the expectation that there is an infrastructure spending coming which I am not sure if you heard anything and you were referring to but the reality is that what the universe markets are liking is this seems like they are pro-US growth encouraging and regulation lessening move. So from that sense it is a good news.
The bad news is that, the Fed is going to be more aggressive and if interest rates are going to rise faster as earnings and US is going to be faster then there could be some relative movement of capital away from emerging market. So it is a trade off between stronger US growth, which should help global growth and a stronger US.Sonia: How do you see all of this play out into the fag end of the year? So far markets like India have underperformed global markets like S&P 500, do you see that degree of underperformance continue or do you think now things could reverse?
A: We first need to get pass through events when we talk specifically about India. We need to get pass the RBI great decision coming up next week and we need to get pass the Fed rate decision, which is coming in two weeks from now.
My biggest concern as an international investor is if the RBI is too aggressive in cutting rates and the Fed is quite hawkish after raising its rates in terms of what is coming then there is risk to the rupee. Therefore, the RBI's cut is little bit between the dilemma of how do they offset the slowing near-term growth because of demonetisation and how do they make sure that the rupee doesn’t go for a big toss in terms of weakening. So I think that is one of the challenges.
My guess is that we are probably in a trading range unless there is any big negative surprise from the Fed in terms of being super hawkish but otherwise we are in a trading range while we try to assess what the impact of the slowdown would be on earnings on Q4. So I don’t see the market having a big rally here but for big downside shock we will have to see big currency hit or an emerging market hit or some negative surprises in terms of GDP growth which I suspect we will not get too much information on by the end of the month that we will get some preliminary numbers on auto sales and other numbers for November and it will be interesting to watch how poorly sales did for some of these sectors in November given -- after November there were still almost three weeks of data for us to see how the economy is doing.Latha: I brought up the Dodd-frank thing primarily because I wanted your reaction to IT stock. That would mean that banking sector would do better in the US already banking stocks have run up a goodish bit since Trump victory, do you think IT sector would be an attractive sector because BFSIs globally may do better?
A: Everything else being equal that would be the case. The wild card is Trump's policy as far as H1B is concerned. I think the some controversy and some uncertainty as to whether or not it is going to be making it harder or it is going to leave it as is. My concern is that that is one unknown that he has not articulated anything since the election that we have to worry about but everything else has been equal, absolutely, better financial sector, US and globally is definitely good news for financial sector for the IT service companies of BFSI business.