Merrill Lynch currently underweight on Indian mkts

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Mark Matthews , Chief Asia Strategist,  Merrill Lynch , believes that the markets have deviated significantly from long-term valuations. The market bounce was overdue and is likely to continue for some time.

 

Matthews is not confident of a strong recovery or even world economy slowing. He thinks that global markets may be near a bottom. A bull market is unlikely, he said. He would prefer to invest in countries with more rate-sensitive stocks.

 

The Goldman Sachs and  Morgan Stanley collapse was prevented by the creation of bank holding companies, he said.

 

Here is a verbatim transcript of the interview with Mark Matthews on CNBC-TV18. Also see the accompanying video.

 

Q: Do you think the worst is over for global markets in the near-term or is it just a temporary relief?

 

A: We are getting a bounce here which was long overdue; however, what we had last week was two extraordinary events--first, in the earlier part of the week was all the turmoil we saw on Wall Street and freezing up in the credit markets, and second, was the bailout which the markets first got wind-off on Friday, Asia time and then over the weekend we got more news about how that is probably going to happen. The markets have deviated significantly from their trading averages as well as their long-term historic valuations; thus, I do think that bounce is overdue and we will continue to get one.

 

Q: Given the fundamentals and the general global events, right now, do you think it is likely and conceivable that in 2008 the lows of the year will be revisited in Asia?

 

A: It is possible. However, I am not sure if we will get at an extremely strong recovery because one of the unfortunate aspects of this whole credit crisis is that it has engendered an economic slowdown in the world outside of the United States, which is clear from the evidences that we are getting. Almost everywhere around the world the economy is beginning to slowdown. It is similar to the Tsunami of 2005, where the first big wave came up and pounded the beach and receded then another big wave came up, and unfortunately, we are between those two.

 

So I can't say whether or not it is the bottom; I suspect it is probably the bottom but at the same time I don't think we will get a big bull market.

 

Q: What is the mood right now for the BRIC universe?

 

A: The BRIC (Brazil, Russia, India and China) is interesting because the indices of Brazil and Russia are about 60-70% are energy and materials, whereas, with respect to China and India one has a higher degree of banks, property companies and interest rate sensitives companies.

 

If we are in an environment where growth is slowing down globally and inflation has peaked in many countries and in some countries, for example, China it has already started to come down. In such a situation, I would probably prefer to be in the countries which have higher exposure to interest rate sensitives such as banks and property companies because they would benefit from a loose monetary policy; whereas, energy and material stocks are plays on global growth, so I wouldn't really expect them to out perform over the next year.

 

Q: There is a new view now that this bailout package will cause a crunching decline for the dollar which had a great year up until now. What are your own thoughts on that?

 

A: It is too early to say something on that and I do not have a strong view on it. However, generally, it should not be positive for the dollar. It also depends on which currency one is talking about. I do not necessarily see a collapse in the dollar given it has already come down so much; however, I do not think it should appreciate that much either.

 

Q: How do you read the development that Goldman Sachs and Morgan Stanley could now become holding banks? Do you think it alleviates the fear of them going down the Lehman path?

 

A: The whole rescue package was a part and parcel of preventing that kind of a scenario. I think that has been prevented, in part because of what you have just, said, but essentially, it's like the Resolution Trust Corporation was in 1989. Thus, illiquid assets from banks will be bought by the government, and eventually, sold on to people who can use them. Therefore, there is much more stability in Wall Street than there was this time last week.

 

Q: If your view is that, we are not ready for a bull market just yet. Do you think Asian markets would broadly be rangebound with limited upside?

 

A: I do, because markets have been extraordinarily efficient in pricing in what has happened so far this year. I have to admit I never really got bearish because the manner in which the markets were falling I thought they were pricing in the bad news already. So, now, we have fallen so much that we do not deserve to fall anymore. The markets are very inexpensive. Even if there is no EPS growth for all of Asia, we are looking at markets which are around 10 times well below the historic average for this region going back to 1980 which is a long time obviously.

 

So, on the one hand, the valuations are low but on the other hand we are going into a global slowdown. Thus, if we add the two together, we probably have choppy rangebound markets which one gets sometimes; it is not always a bull or a bear market, for example, for all of Asia the last time we saw that was 1994-1996. In those three years, the Asian markets were flat and to the best of my ability to forecast, I would think we see a repeat of that situation. My guess is that neither will there be a huge bear market, the likes of what we have seen so far this year, nor a very strong bull market.

 

Q: With respect to India, how high would you rate the chances of out performance against the rest of Asia?

 

A: I have to update all the five different variables that are used to determine the asset allocation. I would say what India has going forward is that exports are a small percentage of India's GDP (Gross Domestic Product). So, considering the global slowdown, one would probably want to avoid countries which are export dependent, and much of Asia is export dependent. However, India is quite different from the other countries such as Indonesia, the economies of which are very small as compared to India.

 

Moreover, in India inflation is currently very high, at about 12.8%, but I also think it is peaked which is good. Also, the prices of energy and materials have come down and that will take pressure off. Further, the monsoon seems to have been quite good and the domestic demand in India appears to be chugging along quite nicely. Still, credit growth is probably about 15-16% this year. So on balance, India looks okay in relative terms. It is a bit more expensive than the rest of Asia, and that is the only thing going against it.