Market fall & oil rise to be contrary not synced: Bowen

Below is the verbatim transcript of the interview. Also watch the accompanying video.

Q: There was one rush of capital coming in the past six weeks or so, after that movement out in December. What sense are you getting? Are fundamentals looking good or is there simply more risk appetite for all asset classes?

A: For the last couple of weeks, the flows into emerging markets have been very strong, in not just India, but also other emerging markets like China, Turkey and South Africa, where the currencies have been strong.

At the same time, we have seen oil prices shoot up. It is strange that the currencies are firm and markets are strong. There is lot of liquidity flurrying around with the US quantitative easing programme going strong.

Until that slows down, markets maybe strong or oil prices may still go up. But, something has to break. At some point, something has to break. You may see oil prices crash or the markets fall. Both cannot keep going up like this.

Q: Does this risk asset party waits for some very serious growth slowdowns in countries like India and China? This is where the higher commodity prices will hurt.

A: Last time in 2008, oil peaked at USD 148, before there was a decline down to 60. Before even the Lehman Brothers burst, oil had fallen from USD 140 to USD 100 per barrel, as it was pricing-in a slowdown in global growth.

We may run into an experience of second half of 2008, where oil shoot up pass USD 148 per bbl, until it starts affecting global growth – US consumers start slowing down, India import bill shoots up, currencies starts to weaken and then global growth will slowdown.

We may knockoff another 100-150 bps of the global GDP growth, as oil prices shoot up. Right now, oil seems one way bet. It is not seen falling. The Libya crisis has change more. There wouldn’t be major disruption in supply from Libya. There are a lot of US dollars floating around that is being invested into oil future market.

Q: Talking about India markets and couple of sectors, we have seen some excitement there off-late. We have seen some of the infrastructure stocks like IVRCL , Punj Lloyd , GMR and Lanco are some of the completely beaten down stocks. Some of them had fallen about 70-80% and have seen quite a bit of rally off-late. Was it just a dead cat bounce or do you think some of these stocks actually represent some value?

A: These companies have strong order books and have some sort of visibility in terms of revenue convergence. The sell-off down 70-80% was completely overdone and maybe they have bounced back to more reasonable levels. For these stocks to continue to have upward momentum, we will have to see growth in order books.

Right now, we aren’t seeing that. For example, BHEL had flat order book for the year and 10% for next year. Other stock like Larsen & Toubro disappoint on their full year order book. So the order book growth rate doesn’t look too great at the moment.

For these stocks to keep going up, they must have better order inflow. They could survive for another few years on revenue convergence.

Q: Real estate is one space where there has been a bit of a rally. Stock like Unitech stands out from Rs 36 to all the way up to Rs 48 or so. What about that particular sector? Would you say book out or do you think there could be some more rally in that?

A: Unitech has rallied 40%. I would suggest one to get out of it, as there is no positive news out there. We don’t invest in real estate sector, so wouldn’t want to comment on valuations. A stock like Unitech is still 60-70% below its peak from 2008. It’s still down 20-25% this year.

It may have approached reasonable valuations. May be a couple of weeks ago, a lot of these stocks were beaten down way beyond fair value. It is coming up to reasonable value right now.

Q: In your Red Cobra Fund, you have preferred the bigger stocks like Infosys , HDFC , Bajaj and Jain Irrigation as well. Do you see that you may have to look at the midcap basket? Is there anything that attracts you?

A: Our strategy is to predominantly stay with these blue chip largecap stocks, which are consistently deliver shareholder value over the last five or ten years. If we look at earnings growth of 20-25% per annum matched by shareholder returns, we see that with lot of the large quality blue chips.

We might be lucky and pick a couple of midcaps, but we run concentrated portfolios with 15-20 names. It’s too much of a risk for us to go and pick one midcap winner.

For example, we got hurt this year on Jain Irrigation. It’s very difficult so we must prefer playing India through these high quality largecap stocks.

Q: What would be the call on IT as we head into the earnings season? You have some sort of investments in Infosys?

A: The global growth environment looks quite decent. The visibility from the Indian IT companies should be okay. People are factoring in 20% dollar growth. That is probably what they will come out as their guidance.

As long as global growth does not slowdown from high commodity prices, they will probably end up beating that. From a margin perspective, another 50-75 basis points decline in margins for the year is reasonable, as they are investing for the future.

The market shouldn’t worry too much about the margin decline, as long as they are investing for the future. If there was margin decline from lower pricing and greater competition, that’s more of a concern. In Infosys, the margin decline is coming from currency and investing in the future.

Q: The great Indian story is supposed to be the consumption story. Do you like any stocks in that space?

A: From a retail end, there are stocks that we have owned in the past like Dabur or Hindustan Unilever . For example, Dabur has been very transparent in terms of their strategy of growing abroad.

They feel the high growth in India is sort of over. They are going ahead abroad looking for acquisitions. This strategy can obviously get risky, so we are waiting to see the strategy play out.

Hindustan Lever has a lot of competitive pressure with Procter & Gamble . It is best is to stay out of that area for now.