The US market is getting some confidence from the strong earnings reported by many key companies there. The macro economic fundamentals of the companies are strong and 70 percent of the companies have beaten expectation.
"Though economic fundamentals in the US may be moderating a bit, they do not seem to be rolling over to where people are afraid that the growth is going away," believes Arvind Sanger of Geosphere Capital Management.
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Meanwhile, the earnings season in India has been a mixed bag, but it has been more good than bad, so far. Also, European Central Bank (ECB) cutting interest rates last week, provided some push to the liquidity looking for risk assets, which is benefiting the Indian market, he pointed out.
If the risk-on trade remains, then India may see pick-up in growth in the second half of the year, but negatives like high inflation and uncertainty on the political front will remain key challenges, he elaborated.
"Passage of any further meaningful bills looks difficult, recovery may be moderate, but one will have to watch monsoon to know how inflation pans for the rest of year. So, there are lots of unknowns. Growth in India will not come roaring come. There could be upside bias to the market, but these factors may prevent the market from rallying."
On sectors, Sanger remains bullish on oil and gas space.
Below is the edited transcript of Sanger's interview to CNBC-TV18.
Q: There has been fantastic leadership from the US markets. What have you made of it? Are people calling for a bit of a halt or is this one headed higher?
A: The popular wisdom is that you sell in May and go away. However, atleast this time, in the first few days of May, the market after looking like it might be rolling over, has rebounded. A part of what has helped is the earnings season that has turned out to be overall reasonably good.
Almost 70 percent of the companies have beaten earnings expectation. This earnings season has provided some confidence. Some of the data recently has been mixed, but overall the market is taking heart in the fact that the companies are doing a good job in terms of generating earnings. The economic fundamentals are moderating a little bit, but they do not seem to be rolling over to where people are afraid that the growth is going away.
Q: It is important because it is tying in with some great flows for other markets including us. Do you expect that to continue? What would you expect the tactical direction to be for markets such as us given this global backdrop?
A: That is a difficult one to call, because clearly, the best returns are being had in markets like the US and Japan where risk-on and central bankers’ liquidity injections and growth expectations; particularly in Japan, are coming back from the dead after a long time. So, those have been some of the best performing markets. However, as both Japan and US have had a pretty good run, investors are looking at the laggards and therefore one has had a bit of a rally in markets like India.
The earnings season in India has been mixed bag, but moderately it is better on many other market leaders and that has helped. There is a certain amount of risk-off. Liquidity is around. We saw European Central Bank (ECB) cut interest rates last week. It was not anything dramatic, but it just continues to provide backdrops for liquidity looking for risk assets. Therefore, India is benefitting from that.
Q: How do you stack up the developed markets versus emerging markets performance as we head into the second half of the year?
A: If the risk-on trade remains, which I think it should, if one starts to see some of the emerging markets show better growth, the growth in the US may moderate a little bit over the next couple of quarters. On the other hand, emerging markets like India may see moderate improvement in growth in the second half, from what is likely to be trough levels over the last couple of quarters. So, if that plays out and there is not any major geopolitical surprise on global basis or in India, then one could see a little bit of a catch up if not outperformance by some emerging markets.
Clearly, China has been one of the biggest laggards and their growth is a lot more uncertain, so I would not paint all emerging markets with one brush. It is going to be country by country and it is going to be bottom-up company growth and top down macro GDP growth which will be drivers for each country and right now, it is not a one size fits all. It is going to depend on specific country and companies or sectors within that country.
Q: Purely in the immediate term, do you see more upside for the US markets now or do you think the time has come to take out some profits?
A: That is such a hard call to make. I must say that we are moderately cautious although the employment numbers on Friday were surprisingly good and that provided a fillip to the market when it looked like it might be rolling over. However, I must say that given the strong run we have had in the first four months of the year, I would say that at this point we are more inclined to see room for a breather. These are trading short-term flows. On a trading basis, I am somewhat cautious about the near-term outlook, however, a five percent trading pullback or maybe a little bit more looks reasonable, barring any geopolitical shock the second half for the US. The companies’ earnings are reasonably good. If there is one market and therefore some sectors that I worry about, they would be companies exposed to China growth and other countries that are dependent on China growth and therefore that is the one part that is much more cloudy and much less certain.
There are companies in US that suffer from that exposure that have lagged, but barring that the outlook is moderately constructive on the medium-term, but somewhat cautious in near-term.
Q: We have been through a difficult first half for market levels per se. What is your sense of how the second half pans out for the market in terms of how much it can gain from hereon? We are at this important technical level where in the past the market has struggled.
A: The market has not been able to make a decisive break on the Nifty above 6000 and stay there. So, we are at that critical level. I think the RBI rate cut last week helped, but as we saw the RBI policy statement was somewhat hawkish.
What has helped the Indian market also is a sharp pullback in commodity prices, particularly in oil and gold and that has made the outlook for the current account deficit (CAD) improve without necessarily as much action happening. Domestically in India, the government has been able to get the oil companies to grow petrol prices. So, those are all positives that helped. Inflation numbers have been benign.
Growth maybe out of trough and is likely to improve, but I am not convinced that we can bet the entire rally based on the external environment taking care of all the problems of the CAD. One of the challenges that remains is the politics that remains under paralysis.
The expectation from the parliament of any meaningful further bills getting passed looks pretty difficult, so that remains a question mark. The recovery maybe moderate, but we will have to watch the monsoon to see how the inflation outlook develops over the rest of the year. So, there are a couple of unknowns that we have to wait and watch in terms of what that implies for growth. Growth in India is not going to come roaring back. What we did see in this quarter is that some of the companies did a better job than expected in bottom-line even if the top-lined was down.
We may have an upward bias, but there are a couple of key things to watch- inflation, monsoons, political turmoil, these are all factors that could prevent the market from rallying, but barring that if the recovery in earnings and in GDP growth starts to become more visible, then the market should be able to move higher again, I am not expecting a spike up, but a general improvement as we go through the rest of the year.
Q: What would you buy now if anything from these two sectors - one is oil and gas where we have seen some of the earnings performance and the other is technology which was a resounding failure, but the stocks have begun to recover.
A: In technology, Infosys was a standout disappointer. There has been a mixed bag, but I do not think it has been all disappointing. Oil and gas is really not so much about the quarter as it is about the policy backdrop-whether it is in policy to encourage more capex both for traditional oil and gas as well as there has been some talk of a new policy being announced for shale gas.
So, I think the government is aware of the fact that one of the biggest driver of CAD is the oil import bill and therefore, it is in India’s own self-interest to try to put policies to encourage that. I think that has been one of our bets in terms of some of the energy names. We have not yet unfortunately seen clear policy action on the gas price.
If the government can do something tomorrow, it will almost never do it today and that seems to certainly hold true in the gas price decision. So, it is going to have to be a patient scheme. There have been some movement on the power sector front where we have seen some efforts to do stuff. The policy sectors remain somewhat of a mixed bag.
The financials have been an interesting place, but the rate environment has been beneficial. Again, whether RBI does much more, remains to be seen. So, I would say that we are not compelled to buy, but we are opportunistically looking at when we get big pullbacks and selloffs. We still like oil and gas. We think the financials may have opportunity. We think some of the power sector industrial names if we saw some more policy action will be interesting. We do not do much in the IT space because it is really a play on global growth and we have other plays to play global growth. So, people are looking for a play on global growth IT as probably one of the preferred sectors in India.
Q: You touched upon financials for a tad bit, but what would you do in general with the rate sensitives? For the last one month this entire pocket has been rallying in anticipation of more aggression from the RBI. Now that that has not come through would you go ahead and sell some of these spaces like autos, financials etc. or would you just expect them to settle into a consolidation phase?
A: There is some risk that we get a bit of a pullback, but trying to parse too much from the policy statement by RBI is difficult to do at this point. RBI is essentially going to be data dependent. The data is going to depend on the big data driver, that is monsoon.
The other one is going to be data on the CAD. So, I think it remains to be seen what comes out of both these factors and therefore I would say that the rate sensitives are not as compelling right now. One still has to wait atleast for the PSU banks as the non-performing asset (NPA) cycle remains somewhat troubling. Private sector banks are little better positioned although their valuations probably reflect that. One will probably get a moderate profit taking while we wait and watch some of the data and see whether the interest rate cycle is turning, but to the extent that the interest rate cycle is not getting worse and is moderating better and growth is recovering, and maybe the NPA cycle is not as dire as some of the more bearish concerns have reflected, then we would look at any pullbacks as potentially selective buying opportunity.
Q: For the Indian markets particularly for the second half of the year do you think that there is a possibility that Foreign Institutional Investor (FII) inflows could wane in the absence of both monetary as well as fiscal policy? Like you mentioned there is paralysis happening in parliament and also now we do not have too much to watch for from the RBI’s end.
A: Absolutely. There is clearly risk in the Indian market that if you do not get a favourable monsoon, benign inflation data, policy help and you get political paralysis and last but not the least, if the big moderation in oil starts to reverse, as we have seen oil prices already rebound USD 5-6/ barrel then suddenly that movement in the sun for India where everything seemed to be coming up roses, dissipates quickly. Then, one could have FII flows look for greener pastures. So, I think the idea that FII flows are destined to come to India, because there is risk-on, is certainly not true and therefore it is going to be very much showy for the Indian market and other markets. Therefore, it is going to depend on how the data plays out within India, how the earnings recovery plays out and how much of a political uncertainty is created.
Q: What was your own rating of the collapse we saw in gold and oil prices? Was it looking like a flash crash or are you worried about what it is portending to in terms of global growth going into the second half?
A: The one commodity that we do not focus on as much, but which is always assumed to be one of the best economic indicators is copper. Copper prices, not withstanding Friday’s very sharp reversal are at two-three year lows and I think that copper prices are reflecting primarily significant demands going out of China in addition to whatever is going on the supply side. If you look at oil, oil also has huge supply both in US and Canada. There is disappointingly moderate demand both from China and other emerging markets and therefore, the supply demand has been somewhat helped by the existing ongoing tensions with Iran where some Iranian oil is off the market. But the oil supply demand fundamentals are not that tight, so oil could remain moderate.
However, I think that there is a seasonal weakness in the second quarter in oil demand, but then it starts to recover. I would not say that the Iranian tensions are about to go away or that growth is going to remain very weak, China could see some moderate improvement in the second half. So, I would say oil is in a trading range. It is not going to run away. The trading range for Brent is probably USD 90-110. We are at USD 105. In the current environment that should be the range.
Gold is a very, very special situation. It does not depend on economic growth, it is based on fear and right now fear has receded somewhat as people believe that all of the policy actions by the central bankers will result in better growth, whether it is in Japan or in US. So, gold has come off for that reason. I do not have a strong view on gold right now. I think gold will do well if growth starts to falter and central bankers have to continue to pump more money. Right now, I am ambivalent as to whether growth is going to fade that quickly. On balance for the next couple of quarters growth will look a little better, but gold remains the insurance policy in place in case growth starts to falter.