Jun 05, 2012 02:20 PM IST | Source: CNBC-TV18

Mood downbeat but time to buy good values now: Citi's Vaish

The world is in a mess and turmoil. Investors are jittery about the world crisis and concerned about investing particularly in India. However, the risks are severe this time as India has to address it own macro problems more than the Greek crisis.

The world is in a mess and turmoil. Investors are jittery about the world crisis and concerned about investing particularly in India. However, the risks are severe this time as India has to address it own macro problems more than the Greek crisis.

Pankaj Vaish, MD and Head of Market-South Asia at Citi is worried that the sentiment is even worse than 2009 and investors are very jittery to invest in India. In a curtain raiser interview to the Citi's 7th India Investor Conference, Vaish speaks to CNBC-TV18's Udayan Mukherjee about the investors’ mood across the globe.

He stresses that India needs to hurry up in taking policy decisions, which may boost sentiments. However, there is a bit of optimism too as he feel, "Our opinion still is that at the end of the day valuations will come to the forefront and so there will be some good values to be bought at these levels. But the mood to your question is definitely downbeat and in some respects even worse than 2009."

To make the most of the difficult environment, Vaish advices to pick the right names which will add best values to the portfolio.

Here is an edited transcript of his comments. Also watch the accompanying video.

Q: How is the world looking? Is it still very uncertain?

A: The mood among our investors is still very downbeat. People are quite concerned as to whether there is some sort of a change happening and not just a cyclical one. Some people have started raising questions about the whole secular story of India and that's what actually worries me the most. So, until last fall I would say we were able to bat away even a 20% selloff by saying fundamentals are good, this is all for real. I think it’s in the last 8-9 months that people have started asking, is this story still intact?

Q: Even long-term investors?

A: I think so. Some of the clients in Singapore actually are asking for suggestions for three to five years which is amazing. It’s lovely to somebody with that sort of a time horizon. There was this sense that will they really be allowed to make money? What sort of backdrop is there? So very tough line of questioning which we have not heard in a very long time.

The mood is difficult. The mood is somewhat downbeat. But the good thing is there is not much going on elsewhere in the world either. Nothing very good is going on elsewhere in the world, so people do have the time to do the research and analysis. We are hoping they will come to our conference with time to sink in and take away all that will be presented at our conference.

Q: The anecdotal evidence that we hear from people is pretty much the similar to what you are saying except that some people make the point that while the talk is very bearish, positioning might not be so bearish yet. Have people actually sold because it’s not showing up in the numbers?

A: You are correct. For example, at least last year you saw some people in the August, September selloff, positions were liquidated. This time we have not seen that and by some accounts that can be construed as even more bearish that people have not yet sold.

As you probably know, I try to be an optimist most of the time, otherwise you feel like you just can't go on, can't show up to work. Since the long-term fundamentals still in our opinion are very good, you have to take these opportunities when valuations get better. 

 I think people are just frozen. They too in their hearts believe that long-term fundamentals are good, so they don’t want to look silly getting out at 12.5 and whatever PE. But they are asking me very tough questions like I was saying earlier which they have not asked in the last five years.

Q: Conviction is shaken?

A: Conviction is shaken and in some sense sentiment feels even worse than 2009. Then people knew it was a sort of collateral damage from the global crisis. Here it is far more local issues. We just can't blame Greece for everything. Those sort of questions are being raised. I am just giving you a picture of what the mood is.

Our opinion still is that at the end of the day valuations will come to the forefront and so there will be some good values to be bought at these levels. But the mood to your question is definitely downbeat and in some respects even worse than 2009.

Q: What are you telling your clients now? Is your central risk still global that in the next two-three months something very ugly might happen in Europe or are you still saying that the risks are local and you need to rise above that to outperform?

A: Our global chief economist Willem Buiter wrote a piece saying Greece will probably exit on January 1, 2013 and they will try to contain it as much as possible, the authorities but it will not be neat and clean. Probably, some sort of deposit guarantee may have to be put out for depositors in other peripheral countries. So, ECB will go down to 0.5%. LTROs of 4-5 years kind of maturities.

They think the global backdrop still got further to play out. In that sort of scenario it’s obviously hard for India to rally. This is over the next few months that the global backdrop is not positive. However, I think a lot of the problems especially with the currency and all that are of around and the proble is not just because of Greece. Because Greece story has kind of been there for two years and we have traded a pretty wide range.

I think what will happen is obviously Indian policymaking, decision making has to improve. Some amount of tactical management of the currency, so RBI is doing a lot and there are few more things that maybe tried and ultimately put your head down and work. 

Earnings are actually coming out okay broadly speaking. There are obviously spots that have not worked out, but broadly speaking earnings are coming out okay. Aditya Narain our strategist is still hanging to this 12-13% earnings growth for this fiscal year and so 18000-18500 kind of range on the Sensex.

Our view is in this environment you just do your homework and pick the right names and they will be good values to be had. The currency is something that I have talked about in the past couple of months also. Despite the optimistic view the currency has been one thing that has worried me a lot.


Q: Is it overdone now or still way to go?

A: For a very short term yes I think it is overdone. I think in terms of the real exchange rate models it probably belongs in the low 50’s like 53 or something like that but it seems to be slightly overdone for the time being. My forex colleagues were telling me that the exporters are just also frozen. They don’t want to sell at these prices because partly strangely also as a follow up to the prohibition of cancelling and rebooking. They don’t want to be doing something and then not have the ability incase something goes really bad to be able to lift the hedge.

What that has done in some sense is you are not getting the full benefit of the export inflows that should have helped balance partly. Importers are obviously concerned. Even FII who in the past have not really bothered too much about currency hedging, are panicked now. A very large fund manager from Hong Kong tells me that he doesn’t really want to talk about the stock market, he just wanted to talk about the currency because last year he managed the stock picks quite well but got hammered on the currency.

Q: Is 60 likely on the rupee you think in an overshoot?

A: See in overshoot I guess all of these things are possible. In currency markets sometimes big numbers tend to act as magnets. I think it would be a gross overshoot. The fair valuation would belong somewhere in the low 50’s. But because it’s somewhat imbalanced right now in terms of what exporters are doing or not doing versus what importers are doing, you are getting some of this flow.

Also a very technical thing, the recent note that came out on futures, I think there was some confusion in the banking community about that whether that means everybody has to come down to the NOP across both right away or you had to do that in each segment including OTC. So people had some OTC versus offsetting futures position.

So in the very short term it’s actually created some extra demand for dollars and the price action two days ago looked like some banks were covering to be in compliance with that. I think there was confusion whether you had to be in compliance right away or by June 30 on the overall thing. So RBI is making clarification on that.

There is some overshoot right now and if you want to depress yourself there are enough things in this country, frankly in any country. You could go to the US and get depressed in a day if you really wanted to. That is always there but ultimately you just have to sort out through the fundamentals and say what makes sense?

What has changed qualitatively in the market globally is because of risk appetite people had the ability to come in early and say okay I understand this was what the fallout from Greece will be. This is how much my portfolio can go down, I am willing to withstand this and they would come in early. Now people are quite concerned about stepping in early and you almost want the movie to be played out.

Euro is almost falling in slow motion. You would almost want it to get down to 1.19 very quickly but it is dripping in very slow motion. People want that to happen before they can say the overall dollar rally is over.

Everybody is going to wait now for some of these important levels to be hit probably 1275 in S&P, 1.19 on the euro, may be Nifty further goes down to the lows of last fall which is 4600. So people are too scared or have little risk appetite to step in early. Also in previous cycles whenever you have slowdown you get relief from things like interest rates and a weak currency tends to help.

In India you have seen no discussion whatsoever. So there is IT getting exciting, textiles, gems and jewellery, pharma, you don’t hear any positive side of that story. In G7 markets there always used to be okay like the dollar is weak at least export earnings will pick up.
You never hear the good side of the release valves that you have.

Another one typically is interest rate. Cyclically interest rate is coming down, that would wind behind your backs. Again there is not much possibility from that now given what RBI said about limited scope for rate cuts. We are in that very strange situation where the cyclical reliefs that you get are not coming to the fore so people will have to almost wait for a quarter or two to actually see that earnings are still following okay, so look lets not get depressed too much and there are some values that can be picked up.


Q: There are new entrants in the market and veterans too who have seen this 5-7 year cycles play out. We have not made any money in equities for five years now, markets are de-rated; everybody is talking about disastrous scenarios typically the time where some of the seasoned long-term investors should have walked in and taken that plunge. What is different this time around?

A: I think partly the answer is those safety valves that I was talking about. They typically come to the fore. Every cycle then you get the interest rates turn in 300-400 bps and so that helps you, banks start picking up, real estate starts, all the interest rate sensitive.

Q: Investors are not seeing that happen this time?

A: Right now you cannot see that. You just say they have done 50 bps but they have said that there is not room to do much more and you can understand the framework that they are working with. So then you cannot get too excited. The whole NPA story gets partial relief from interest rates coming down.

I think people are worried on that front. Secondly, weak currency tends to help the exporters and all of that, again you get no discussion on that whatsoever even Infosys in fact - people got worried about that. Part of the answer is that you are not getting those cyclical reliefs that you get.

I just don't think I can beat about the bush on this one as people are just feeling like they have been waiting for quite some time for policymaking activism and that has simply not happened. If we are supposed to be in the new secular phase of growth then we cannot be looking back to how things used to be in prior episodes. We have to be active everywhere in New Delhi, Mumbai, corporate world, universities, everywhere and feeling of things have slowed down.

I think that is the frustration that people kept thinking something is coming, wait for the election, wait for the inflation to turndown, wait for the Budget speech, wait for the next parliament session and if some of those policy making things haven’t come through people are tired.

They all understand the reason why they are not coming through - its coalition politics but at the end of the day its not coming through. So that is the concern and another safety valve or the way this plays out is typically then you get elections. People think the new party will come in to power or whatever it is like there will be a cleaner version.

Coming back to my optimism that is where you have to keep your cool and say this is still a good story. I would be worried about the story if those long-term demographic issues, education issues, the entrepreneurial spirit that sort of started dissipating and that has not happened yet. That is why I feel that that the story is still intact.


Q: Has the market been de-rated enough because for people who are valuation watchers they are saying 12.5 is attractive but bear markets are bottomed out at 10 PE. Given the circumstances around us today who is to say we don't get down there?

A: You are right who is to say we don't get down there. That can happen and especially if the global backdrop gets worse that will just nudge us over as well. My sense is that there are still investments to be made. Especially if Europe becomes a little bit too hot for people to not only not get into but actually to pull more money out of.

You will still want to come to even 5% real GDP economy, a 10-11% nominal GDP economy you will still want to come there. As long as corporate earnings are still doing alright I think some of those brave souls that you were talking about or the veterans will want to come in and say this is what is making sense.

I was surprised that at least a couple of investors asked us about three-five year picks to our team. So that is promising, that maybe people say I do not know what the heck is happening in the next 12 months or even 24 months but maybe there is some interesting opportunities coming up and so that is good.

I am hopeful that people will see that and because the long-term stuff is still intact and say okay I need to start nibbling here a little bit and there is not that many alternatives.

Q: So what is your team's answer to that question because that’s a legitimate question that I buy today. I do not mind if stocks go down 20% in the next six months but I want to be 2X-3X in two-three years from now, what would you buy then. What would Citi tell investors to buy here?

A: We were specifically asked about specific sectors also because these are savvy people who have done their homework so there were questions on the oil and gas sector. So there are names and I should probably not get into too many of those but publicly guys like Gujarat State Petrol (GSPL) is the name that was pulled out there and has good fundamentals or long-term story, it could be a 2x-3x kind of a story.

Even in financials, people starting to ask about how bad could this NPA cycle be and then do you see loan growth coming back after the cycle is ended. So its good that people are thinking along those lines and now getting into specific names rather than just macro because it can depress the heck out of you. I hope that at some stage a lot more people will start doing that once they have got know their frustration for the time being.

Q: What's the optimistic scenario? Bad things happen in the global markets for theree to four month months, we get down to a low. What turns this around?

A: I think if we could definitely demonstrate something on the budget deficit front because RBI has made that quite clear. It is as clear as any connection can be made that any further policy action will be dependent on progress on budget deficit and the finance ministry has acknowledged that as well.

So, if this political difficult decision of diesel price hike were to come through by next EGoM, even if it is partial, even if it’s Rs 3 and not a bigger amount, I think it will just be a good down payment to saying this is what we are doing.

I think that will be helpful.  I have another crazy thought which is and I speak personally right now. If Pranab Mukherjee were to become President which is so richly deserved for a long history, I think it would be great to have someone that the market would be very excited about as a finance minister and luckily we have somebody in the cabinet like Manmohan Singh.

Q: That is a crazy idea!

A: I think he has lots of talent in that field, he has pulled India out before in 1991 and can probably do wonders if he were focused on that ministry. Let me re-emphasis it as a personal opinion- what tends to happen when you are in a stalemate, you need to shake things up. It is very hard to know that they will necessarily be the best things at hindsight but you just need to shake things up, you need to just do a few dramatic things as well.

If you think gold is what is holding the rupee back, may be for a time, if we need to slap at 10% duty, let’s slap a 10% duty. I think people are now moved economically so far ahead that people are not going to be smuggling in tonnes of gold every time they travel to New York. So that worry can be set aside.

Let us just try some big bold things which is what global investors would want to see. These marginal changes are here and there. Firstly they start eroding your credibility and then you start using up the limited bullets that you have.


So, in addition to his Prime Minister job if he was the full time FM as well I just think people would get excited because he is clearly one of the smartest economists in the planet right now. He understands what makes the economy tick. This is a field where nobody would challenge him, he would get the markets excited and so again a crazy very personal thought but just an idea to shake things up.

Q: Let me ask you about fixed income. What are you telling your clients on that front because contrary to expectations that the FII limit on bonds would go up. It has not but if you were to tell them about positioning in India what would you tell them about fixed income versus equities?

A: Fixed income at these yields is an amazing thing to be an important part of your portfolio. Typically as they say when you are young you want to have a big chunk in equities. So let’s say for a household the oldest member is 35, let’s say 70% equities and 30% fixed income.

Given where yields are now it probably makes sense to skew that and 50-50 or something. But 10-11% or 10.5%in decent corporate bonds for INR denominated investors, households here is a very good thing to have in your portfolio, INR denominated investors.

So that is very important thing to have even equity markets. It may only give you 10-15% in the long run. So to have this as part of your portfolio which also gives you then the added stability of the value of your portfolio every year is a good component to have.

The great thing in India is that the curve is pretty flat so you can go out long duration. I know this short-term FMP tend to be in vogue but I have a bit of counterintuitive in this which is to say at these high absolute level of yields you want to lock-in duration.

This is specially if you think as India develops further, as capacity gets added more inflation will not necessarily stay at this 8-10% but in fact will come down. Five years out it could be 5%.

Q: So the tax free bond of 8% makes sense for 10-15 years?

A: Yes, I think long duration at these sorts of yields makes sense. I think there should be an important part of most household portfolio.

Q: When is the earliest you think the Sensex can make a new high?

A: We almost touched. I think we will need some clarity on the cyclical relief both monetary policy wise as well as fiscal/political to make new highs. Elections are in 2014, the next schedule would be 2014. It may take somewhere right around that time.

Q: Next year will surprise you?

A: Yes, so that would have been my bid offer between 2013 – between a year from now. Elections are exactly two years from now so between 12-24 months from now is probably when we would have a chance of making it.

Q: So you are optimistic?

A: I am optimistic.

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