Following the recent relief rally, sentiment for risk assets appears to have turned negative again with the Nifty closing in the red yesterday, and expected to start sharply lower today. Both the moves have been dictated by movement in global equities.
But the ongoing volatility does not accurately reflect concerns that the US -- or the global economy -- may sink into a recession going forward, says Geoff Lewis of Manulife Asset Management.
In an interview with CNBC-TV18, Lewis said that weakness in oil prices, one of the biggest worries of the stock market, likely reflects the oversupply situation rather than weak demand.
Consequently, he said investors should look past the volatility to increase exposure to high conviction stocks but stay diversified at the same time. "Most importantly, do not try to time the market [by trying to exit now and hoping to buy stocks cheaper later]. You will miss the rebound."
Below is the verbatim transcript of Geoff Lewis' interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Where does this global rout end at all? There are some brokerages which are beginning to use the R word, recession?
A: I think investors have been worried about a number of things. Will it be a hard landing in China, what is the low oil price telling us about the global economy? So there have been worries about fundamentals. Looking at it, we haven’t seen any significant deterioration that Chinese data and they have the fiscal or monetary scope to introduce more policy measures as we saw yesterday with a mortgage restrictions.
With regards to the US economy, growth is uneven but that has been the nature of the quarter-on-quarter (Q-o-Q) changes, you get a good quarter or a bad quarter and so on. The labour market is pretty firm, so we still think there is very low chance of US recession.
What oil prices are telling us is that there is too much supply, it is not a sign that global demand for commodities and oil is collapsing and you have never had a global recession unless post the US recession -- US economy has been in a recession and we have had 50 percent increase in oil prices.
So we are comfortable that these fears that investors have had are not going to materialise. This makes us believe this is a market correction, unusual perhaps to have a correction in January at the start of the year but we see it as a mid-cycle correction not as a fundamental change in the direction of markets for the whole year.
Sonia: There is nothing that makes you believe that a bear market for global equities has begun?
A: You can find these things in the bear market if it is 20 percent from the high and some markets already are in that kind of condition but looking for a sustained bear market, you need economy to do poorly and we believe that the Wall Street maybe a little bit disappointing compared to earlier expectations, it is still going to perform at least in line with last year.
So we have got a continuation of growth, a little bit sluggish perhaps and low inflation and the Fed, we believe, may not raise interest rates again this year. So that is a reasonable conducive environment for equities.
What we haven’t seen of course is that we haven’t seen a stabilisation in earnings momentum. You continue to get more downgrades and upgrades and I think investors are looking for earnings, they want to see the money and we will probably need to see that to improve before markets can rally strongly.
Latha: What is the sense you are getting, are investors selling out of India, are they just not buying? What are they doing with their cash?
A: The data changes almost daily. We have had a few days where we have seen some marginal inflows but in this risk-on risk-off environment, it has been mostly risk-off and you have had fairly substantial foreign portfolio outflows from emerging markets as an asset class, India has suffered its share but it still thus looks relatively more attractive in terms of its domestic economic fundamentals are holding up better than elsewhere, it looks more like a normal economy, it has still got positive inflation.
So I think we have to wait and see but I don’t think investors are going to be accelerating the Indian market at this point. So I think we have to wait until risk appetite normalises a bit but then India is quite well placed once investors become a little bit more optimistic.
Sonia: What are you doing in this situation, what are you advising your clients to do in the first half of 2016?
A: One thing we are advising them is look through the volatility. In our funds, we are using the sell-off to look for some areas where particularly high conviction stocks now look cheap. So we are looking at this as an opportunity from a bottom-up perspective.
For investors, we are saying if this is a correction, don’t try and time it, don’t get out of the market because you won't get back in, the rebounds tend to be sharp when they arise. So stay diversified across asset classes. You need to have some bonds or fixed income in your portfolio as well and it is not a time to take big allocation but you need to be diversified geographically.
We can find arguments for having some US equity, some European equity and amongst the emerging markets, we would prefer the Asian economies included India over Latin America or Eastern Europe, Middle East.
Latha: But you are not going into cash?
A: No. This is the time to be looking to deploy a little cash as the opportunities arise. That is what one should do when one has a correction like this. Correction may seem fearful time when they provide opportunities to fund managers.
(Copy edited by Nazim Khan, interview transcribed by Sonal Jadhav)