The month of August has been particularly good for India, which has surprisingly outdone most of the emerging markets. Speaking about the domestic markets, Hans Goetti of Finaport says India had seen a lot of inflows from foreign institutional investors, which are driving equity prices.
Goetti says despite a host of negatives like fears of drought, negative impact on growth due to power outages, wobbly political scene at the Centre, slowdown in consumption etc, Indian equity market had held steady. Obviously equity markets have discounted these negatives and "that makes us optimistic on India," he told CNBC-TV18 in an exclusive interview. He advised investors to look at financials, despite the current interest rate regime.
Globally, he believes equities are trading on hopes of more quantative easing (QE) coming out of the US and Europe, however, the likelihood for one in the near-term looks bleak. He recommends defensive stocks with high earnings visibility and the potential to increase their dividends.
Here is the edited transcript of the interview on CNBC-TV18.
Q: I will come to you with regards to all of the macro data that actually came out from the US, which was completely mixed and do you think that there is a lesser probability that the US Fed will possibly move in terms of quantitative easing and what is the necessity of quantitative easing at this point in time?
A: The data that has come out over the last few days has indeed been mixed. We are still looking at a relatively weak economy even if certain indicators are pointing upward over the last few days. We are still in a deleveraging cycle, which is going to last probably another 3-5 years.
That hinders growth from taking halt. Again, you would be talking about 1.5% growth despite the fact that we have had record fiscal monetary stimulus. That's not very strong. So, we think the fed might actually opt for more QE. But, at this point in time maybe the obstacles are a bit higher because the data is not as weak as it should be for the Fed to embark on QE. But, we think that over the next few quarters, QE will be inevitable as the economy slows even more into 2013.
Q: How are we looking at the current quarter itself? It is not unlikely that the fed will look at what the S&P is telling it in terms of how it perceives the economy. The FMP is from 3-4 year highs at this juncture and in the event that the fed doesn't see anything at Jackson Hole or nothing very concrete at Jackson Hole, are we going to see a let-off in the markets or do you think equities will be able to hold on in 2012?
A: Equity markets are trading on hopes of QE, whether it is the Fed or the ECB. If that QE doesn't come through, we are afraid that there could be a correction and probably quite a sharp one. So, it is the hope that keeps everything up again.
Earnings are coming in more or less according to our expectations, but when you look at the fundamentals, top-line growth is lacking, guidance is weak. The fundamentals are not very supportive of higher prices and we probably have to look at the bond market for guidance. As a matter of fact, we think that QE is very necessary for this market to go higher.
Q: One asset class which is extremely pertinent to the Indian markets is Brent crude and we have seen quite a rally in terms of Brent crude and they are sitting at three month highs as we speak. What is keeping crude so buoyant and what is your expectation in terms of its movement going forward?
A: We have crosscurrents obviously. Crude should be lower if you base it on the outlook for the global economy because that would dampen demand for crude oil. Both are keeping the oil price up and actually could even contribute to a further increase depending on the political situation in the Middle East. There is a lot of noise again that Israel might strike Iran ahead of the US election and so on.
The whole situation, the political situation in Middle East is conducive for higher oil prices. We think that we have these crosscurrents and oil will probably be rangebound over the next few months unless you actually do have a calamity like a war in the Middle East and of course then you could blow up on the upside. But that's not predictable.
Q: What about the fund flows that you have seen towards emerging market equities? From an Indian standpoint, August has been better than almost any month we have had in 2012 and we have had some good months when the year opened in January and February. Do you suspect emerging market equities will continue it? More importantly, will this relative outperformance of Indian markets continue?
A: About emerging markets I am not convinced, but India amazingly has actually had a lot of inflows from foreign investors. What's interesting is that foreigners have actually been buyers whereas, domestic investors have been sellers and we are seeing this now for quite sometime.
Foreigners have actually been driving equity prices in India and based on that we could possibly see some further rises because in a risk-on environment we could see foreigners going into India, especially because it offers an alternative to the other emerging markets. India is a little less dependent on exports and a lot of bad news has been discounted in India.
Q: Just wanted your opinion on what exactly FIIs or investors are making with regards to the macro situation in India because we did get a surprise inflation figure of 6.87% for July, but that’s pretty much expected to be an aberration. What exactly are investors making of the macro situation that we are dealing with?
A: On the macro side in India, not much has gone right lately. We have had a lack of monsoon, power outages, inflation and a lot of things and consumer spending is down. Yet the equity market has held up remarkably well and that points to some resilience which is underlying.
That also points to the fact that the equity market has discounted a lot of this bad news and that makes us elatively optimistic regarding the Indian market, at least relative to the rest of Asia and other emerging markets. I think foreigners are looking at that and I think foreigners want to invest in a relatively strong domestic growth, which India still has.
Q: Would you drill down a bit more? Where would you park money or advise money be parked in India within the equities basket?
A: We would think that the financial sector is still attractive. We are still in this easing cycle as far as monetary policy is concerned. Whether inflation stays high or not we are already in an easing cycle. So the interest rates will come down. That benefits banks obviously.
In the consumer side probably anything related to the auto sector, probably rural consumption but of course that will depend again on where the monsoon is going. But, I would say that the financial sector first and foremost would be high in our list.