Market won't collapse; economy not on brink: Credit Suisse

The Indian economy is not in as terrible a shape as the market fears, says Neelkanth Mishra, Head Equity Strategy India, Credit Suisse. In an interview with CNBC-TV18, Mishra said that most fund managers are extremely bearish on India, but the market was unlikely to see a "cataclysmic fall".

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Foreign fund flows into India have slowed down over the last month, and fears are that overseas investors could start pulling out of India in a big way in the coming days as the economy is still not showing any signs of recovery.
Mishra says most of the money that has come into India in recent times is long term in nature, and that many Sovereign Wealth Funds have heavily invested in India. He said many India-focussed funds were facing redemption pressures and that was the key reason for the slowdown in foreign fund flows.
Mishra expects an earnings downside risk of 10 percent this financial year, but sees the market giving positive returns over the next 12 months.

Below is the verbatim transcript of Neelkanth Mishra's interview on CNBC-TV18

Q: The screen has been looking a bit scary particularly the broader market, the midcaps over the last many weeks. Is there a risk of getting into a full blown bear market?
A: We have already been underperforming the world markets for quite a while. In fact, in local currency terms this year, we are 49th out of 50 markets. Even in dollar terms, we are 43rd out of 50 markets. So I think the equity market in India has already been doing quite badly. These are the ranks for the broader market, not just Nifty or Sensex. We have to look at this with regards to what’s happening globally in equities.
Most of the people I have met recently, have been most bearish, I have ever seen them. Most large fund managers in India, most India observers sitting outside are extremely worried about what’s happening in India. We have been flagging some of these risks for quite a while, but now we are seeing that the pessimism is getting in too much and is going out of hands. I don’t think the economy is in that bad position.

With regards to foreign investors, the money that we are getting so far is mostly allocation money coming from multi-year perspective and not for three-six month gain. Even among Sovereign Wealth Fund, there are people who trade around in ETFs but in general, I expect this money to have a lot of patience. This money had lot of patience in the last 15 years and expect it to have that for quite a while as well. So I don’t think the market will enter a phase which will be disastrous.

Q: Over the last couple of months, we have been talking about earnings bottoming out - that being the trough phase for the market - that’s where it builds a base but hasn’t bottomed through yet and probably won’t. Then, what kind of trajectory do you think things are going to move in over the next few months?
A: We never said earnings have bottomed out. I still think FY14 earnings have 10 percent downside from where we are now. Earnings will keep getting cut, but from a time correction perspective, FY14 will be up five-six percent over FY13. FY13 is going to end up two-three percentage points over FY12 and that’s four-five percent move in forward earnings. You have a five-seven percent, maybe 10 percent increase in the multiples because globally, the asset allocators are going to move into equities over the next several years - that’s what the global strategists say and I fully believe that. So, market can deliver reasonable earnings. There will be periods of volatility.
India is high beta on capital flows and there will be periods when global growth momentum comes for a few months. As that happens, there will be some risk off as capital flows into India, slowly people would start worrying about the current account deficit (CAD) and the currency. A weaker currency means higher inflation and bad fiscal and we start spiralling down. Then, capital flows will restart and we come back again. Therefore, it won’t be a very smooth ride but from a 12 months perspective, we should end up from where we are.
_PAGEBREAK_ Q: What are your expectations over the next couple of months, a period of complete purging when the entire market goes in for a bit of a toss, corrects sharply and then begins reconstruction?
A: We have already seen capitulation for many sectors. With regards to a few stocks and metals and mining space, someone asked me - at what level should I be buying? I said maybe 25 percent down from where we are now, he started laughing. The stocks have already hit those levels. So there has been, I wouldn’t say complete capitulation, maybe more downside because the fundamentals are deteriorating, the economy is going into a tailspin. But, there is a lot that is going right for the economy.
We are completely ignoring some of the positive developments that are happening. I myself was very cynical and sceptical that the diesel price increases will happen for more than one-two times, but they seem to be happening and the public is also taking it in each step and that is encouraging for the government. Now, we have seen the railways talking openly about public private partnership (PPP).
We are talking about opening up defence, people started talking about it in September last year and we were quite dismissive and people were excited. We were dismissive because these things affect the economy over four-six years, maybe six-eight years in some cases, so, there was no point in getting all excited about the economy. The economy, at least the investment side and the middle income side will continue to weaken. We have gone into a very dangerous phase where both these are feeding off each other.
According to our recent note, The Silent Transformation, a very large part of India’s population is seeing things change like never before. There is a lot of cynicism as we spoke to investors about the report. With very powerful anecdotes in charts and a lot of secondary analysis, we show there is something structurally going on in that part of the market in the economy. The broader economy seems positive. From a three-four year perspective, if I was a Sovereign Wealth Fund, I would be buying truck loads of India when everybody else is selling.

Q: With regards to your point on pessimism, we got USD 12 billion in the first three months of this year, so the talk is bearish but the selling has not come through. If everybody was bearish, would foreign institutional investors (FIIs) be net sellers? They have pumped in an average of USD 4 billion a month.
A: In case of FIIs, there is a lot of allocation of money. There are Sovereign Wealth Funds that we showed in our note in September last year and that would be putting USD 8-10 billion a year, like a systematic investment plan (SIP). We have seen that over the last 15-20 years, I don’t know why we are surprised by this. Now, the pension funds and insurance funds are going to restart.
The reallocation process is expected, but has not yet started. Once that starts, there will be more funds coming in. All India focus fund managers are seeing redemptions, domestic fund managers are seeing redemptions. You meet the average individual on the street, the weaker hands in the market are being squeezed out as the market is hit. For example, in Japan, the retail investor, the moment he sees that the market is back to the peak levels as he saw in yen terms, he is selling off. Some FIIs who have seen Japanese retail money, are seeing significant redemptions, so there are a lot of people who are worried.
The money that we are seeing, due to which there is a cue in the market that the midcaps are getting hammered while some largecaps continue to find favour, is that this is all allocation money. There is no one consciously making that decision. I can name you Sovereign Wealth Funds who are extremely negative in terms of the near term fundamentals of India, but if you look at the annual reports, last year they bought a lot of India. So, I think the pessimism for anyone who has the option of making discretionary allocations - that mood is very negative.