Arvind Sanger of Geosphere Capital Management believes India overshot on the upside in early 2013, egged on by euphoria around possible policy actions. "And as we are finding both from the economic data and from the policy decisions, including the Budget that came out last week, there are no easy magic wands out there," he told CNBC-TV18 in an interview.
Sanger feels weak earnings growth and inflation remain the key concerns for the Indian economy. "The government is raising diesel and fuel prices. It does reduce, somewhat, the subsidy burden but it causes some inflationary pressure. It hurts consumer demand because you are switching from burdening the government to burdening the consumers. So consumer demand is slowing down," he explains.
Sanger says the Indian market could continue to drift sideways to lower in a global risk off. "I don’t see a big crash coming, but for the bull story to resume, you need to see some good news," he says adding, the only good news could be that crude oil gets pulled back from the high of USD 130 to USD 110.
However, he says, India has never been negatively correlated to oil. "Oil is going down because global growth is looking slow, it doesn’t help the Indian market," he told the channel.
For the near-term, he says the Nifty could move to 5,600.
Below is the verbatim transcript of his interview to CNBC-TV18
Q: It looks like there is quite a bit of risk aversion on the screen globally. What have you made of it? Do you foresee more damage for equity markets like India in the month of March?
A: We have clearly turned the page at least for the short-term. From everything is rosy on a global basis to suddenly starting to see cracks that were being ignored. I guess the Italian election was the first thing that caught the markets attention. Secondly, people are surprised the impasse on the US Budget situation with the sequestration is also causing some nervousness. Although, the market was fine with it on Friday.
It wasn’t expecting a magic solution over the weekend. So, the market is digesting that, but now there is news coming out of China. It suggests that the Chinese bounce back from extremely slow growth. Forget the GDP numbers, but they had very weak growth in the first half. It seemed to be bouncing back towards the end of the year. There are signs that the government is going to clampdown the property and other things are not looking that strong.
So, we have got three major global economic legs having some wobbliness to them. It does cause some amount of risk aversion, which could continue. There is a bit of a short-term trading risk to global markets and therefore to the Indian market too.
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Q: What is he bigger problem according to you, between the Italian uncertainty and the sequestration problem which has cropped up over the weekend or got confirmed over the weekend, which one of these two do you think has the higher probability of driving a phase of risk off in global equities?
A: May be the Italian problem is bigger, but they both are part of the same problem. The problem is not governments, but the voters. The voters are not adjusted to having to tighten their belt and to live within the means of the Budget. Therefore, they are trying to find easier solutions in Italy by the amount of votes that both the parties got. It shows that the voters are not happy with the formula that has been proposed, which is continuous belt tightening and trying to look within the means through fiscal tightening. That is not being looked at favorably.
Same way the debate in US, the president and the Democratic Party had taken from the election that we don’t have to really fix entitlements. This is long-term, almost any Budget observer will agree. However, the argument has become ‘are the rich paying too little taxes?’ So it has taken away from what needs to be the focus or what the fundamental issue is.
So, may be the markets are starting to fright that this kicking the can down the road with the central bankers providing easy money is not quite as painless. Thus, growth is going to remain challenged. As one gets these kinds of bumps in the road they are reminded again that growth is challenging. Financial markets may be willing to forgive and forget for a while, when the Central Bankers print money.
However, eventually it does affect earnings growth. Therefore, market expectations of optimism about earnings growth numbers and what valuations they are willing to pay for companies.
Q: What about India? It has become an underperforming market in 2013 so far and the Budget did not do anything to reverse that underperformance. How much more downside you think is there in Indian stocks?
A: India probably overshot on the upside in 2012 and early 2013. There was a bit of euphoria about how much policy would magically mix things. As we are finding both from the economic data and from the policy decisions including the Budget that came out last week, there are no easy magic wands out there.
So, the government is raising diesel and fuel prices in general. It does reduce the subsidy burden, but it causes some inflationary pressure. It hurts consumer demand because one is switching from burdening the government to burdening the consumers. So, consumer demand is slowing down. The GDP growth doesn’t seem to be a magic bullet as yet to turn that around.
One has got the issues with the GDP growth and therefore the earnings growth. One has still got the risk of inflation, which means that Reserve Bank of India (RBI) is limited in how much they can do. They are concerned about growth. So, more wiling to act favorably and be benign, even though inflation is higher than from a long-term standpoint.
However even then there is only so much they can do. The idea that may be the government is partly responsible in its road shows, selling investors on the India story. The reality as the Budget showed there are no easy magic bullets out there to fix the growth problem. The Indian market could also continue to drift side ways to lower in a global risk off.
I don't see a big crash coming, but for the bull story to resume one needs to see some good news. The only good news I can find is that crude oil has pulled back from the high of USD 130 to USD 110. However, India has never been negatively correlated to oil because oil is going down and global growth is looking slow. It doesn’t help the Indian market.
Q: How would you quantify in terms of how much more downside risk you see for the market? We have lost quite a bit of ground. Would you say we are somewhere near the end of the selling pressure or do you think India has got a rough couple of weeks coming?
A: Your guess is as good as mine on how the news flow shapes up in the next couple of weeks. Whether the Italian left and right form a collation government and managed to stave off elections for a few months and that caused a bit of relief rally. The US sequestration noise continues, but there is another issue coming up towards the end of March.
The government will shut down without extending the governments Budget authority. Both sides are talking about extending that. So, there is no government shutdown even though there will be some cut backs as a result of sequester. There is enough positive and negative noise that can come that the market could bounce around. However, in that backdrop India is more buffeted by global news than anything coming up.
India specific, that is likely to be meaningfully relevant over the next two weeks in which case the Indian market could pullback. We could go to 5600 on the Nifty that technically looks like a level that could happen. However, this becomes a more technical call than a fundamental call at this point, in terms of short-term trading action.
Anything more than that in terms of an Indian market pullback would involve a much more dramatic global risk off. This would be caused by either the US Budget side on the government continuing to operate that breaking down or the Italian parties completely failing and having a new election and creating more turmoil in Europe.
So, one could have some things that could cause much more meaningful risk off from a global basis. In this case the Indian markets could have slightly more downside. 5-7 percent downside is probably a reasonable case in terms of where we can go from here, in terms of global risk off.