Oct 18, 2016 09:00 AM IST | Source: CNBC-TV18

US polls, Fed hike in Dec key issues for FIIs: Bank Julius Baer

The Indian market is big and liquid, there is not reason for money to move out of India, Mark Matthews, Bank Julius Baer and Co says. He expects the Indian market to do well over the next 12 months.

Presidential elections in the US is a key issue and is the number one concern for equity markets across the globe, says Mark Matthews, Bank Julius Baer and Co. This and a possible US Federal Reserve rate hike are two issues that have also concerned Foreign Institutional Investors FIIs, leading to sell-offs in India.

Although, Donald Trump's economic policies, which include higher infrastructure spending, would lead to higher US growth rate, the market does not like his policies on trade barriers and building walls on borders and other such rhetoric.

The Indian market is big and liquid, there is not reason for money to move out of India, he says. He expects the Indian market to do well over the next 12 months.

He is positive on the Chinese stocks as the Producer Price Index rose for the first time in four years. He also likes UK stocks due to the weaker pound.

Below is the transcript of Mark Matthews’ interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: I wanted to ask you what the fear is now because there is some risk aversion that we are seeing in global equities including India. There has been Rs 2,500 crore of selling in India in just three days. What are foreign investors worried about?

A: The election in the US obviously would be a key issue even though Clinton’s popularity has far surpassed Trump’s in the last two weeks. You never know until the day itself. As the Trump campaign seems to be encountering more and more difficulties, we are seeing a great increase in tensions there. So, political tensions in the US, I would probably put as number one. And then, with the Fed, you can also never say never, there is a November meeting just a couple of days before the presidential election. They will not move then. But possibly in December. Personally, I do not think so. So, those would be the two big issues emanating both from the United States.

Latha: Over the last two weeks, we have seen money moving out of Indian markets, foreign institutional investor (FII) money, as well, we have seen a strengthening of the dollar in the last one week. Should we see more of this, more dollar strengthening, more yield and India aversion?

A: I do believe that the dollar of the three major currencies should continue to be the strongest, but only on a very small basis. I do not see it going significantly above 100 on the dollar index. It is currently around 97-98. So I do not see that much upside, but I do think that between the dollar or the euro and the yen, there are still more compelling reasons to own the dollar. And then, on flows, I cannot really say why people would have been taking their money out of India over the last two weeks, because ironically, it is considered a relatively defensive market in that it is big and liquid. So, I do not know why people would have been doing that.

Sonia: Coming back to the first concern that you spoke about which is the political tensions in the US due to the elections, do you get a sense that whoever becomes the president of the US, once that event is out of the way, it will be back to normal for the markets and they could perhaps resume the uptrend because the overhang is going out of the way?

A: Clearly, if it is Donald Trump, that is a very different path from what the US has been on over the last 10 years and it is difficult to say ironically, his economic policies would probably produce a greater economic growth rate because he wants to cut corporate and income taxes, wants to boost infrastructure spending. But it comes with all of this rhetoric which the market clearly does not like in terms of building walls and various trade barriers, etc. And then with Hillary, one could say it should be business as usual. The only thing is that I do not think that the democrats will get either the senator or the house and so we will be in a situation where the president will still be a little bit unable to pass major legislation because they will not have the Congress on their side.

Latha: What is your pecking order in terms of equity markets now?

A: I do not know if I put it in a particular order, but I would say that I like Chinese stocks because the important number for the whole world including India on Friday was that China’s producer price index broke above zero on a year-on-year basis for the first time in 55 months. So, when you think about all the deflation that China has been exporting to the rest of the world is a major piece of news. And I think it should continue to trend higher into positive territory. So, China I like. I also think that UK stocks are good because the weakness in the pound without doubt be a great benefit to their economy. And actually if you look at their stock market, only about 25 percent of their revenues come from the UK itself. So, the more the pound falls, the more their profits rise. A little bit like Infosys or Tata Consultancy Services (TCS) in India. And I like energy stocks because they have high dividends and the oil price should be relatively firm.

Sonia: So, over the next six months, what do you think the market trajectory could be? How high is the possibility of a big crash in global markets or do you think that it could just restrict itself to about a 5-10 percent cut?

A: If you consider that the US is by far the largest market in the world – it is a USD 24 trillion dollar market – the next largest is Japan and it is only a fifth of the size. We all take our cue from the Standard and Poor (S&P) and for good reason. I would have thought that the S&P should remain in a consolidation kind of phase simply because it is too expensive, the price earnings ratio now touching 19 times. If you look back in history, when the US stock market gets to this kind of price earnings ratio, the returns on an annual basis over the next few years are usually below 5 percent per year. So, the US I would see as being constrained by its high valuation and therefore, that does not necessarily mean that the other markets cannot go up. But, the benchmark I do not expect to rise significantly. But that leaves other markets at least, if the S&P is not collapsing, they can do fine. And India should be one market that also does fine over the next 12 months.

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