See upside in infra, power if reforms pick up: Geosphere

In an interview with CNBC-TV18, Arvind Sanger, Managing Partner at Geosphere Capital Management spoke about what kind of impact could fiscal cliff have for our markets and markets globally.

Below is a verbatim transcript of the interview Q: We had spoken earlier this week about the kind of scenarios we would have stepping into 2013. It seems like there is some kind of a compromised solution. How would you read the impact of that and the importance of it from markets? A: I think the second scenario you have discussed is the one that I was just discussing. I am not sure that there is any deal being discussed right now that would comprehensively solve the problem for several quarters, my assumption is whatever deal comes out--it results in avoiding fiscal cliff--it reaches a compromise on few other issues that are somewhat more critical and timely. It still leaves the comprehensive issues on spending reform and on tax policy including deductions, which ones to limit or not to limit for next year. With no vote on the debt ceiling, the debt ceiling will be the sword over the head of the government, which the Republicans will use to get their viewpoint across when they are negotiating with the Obama administration and the Democrats. Q: Moving over this fiscal cliff hump though and the details that we may see over the course of the next few days, are you getting the feeling that in 2013 some of this global risk has been limited or reduced? A: I would not say that all the risks are off because in the US reaching some kind of a long-term comprehensive framework is still the effort of both sides but it is quite possible that they won’t come to a good compromise. So will they find a reasonably acceptable and suitable kick the can down the road approach remains an open question. I think that still remains as a risk.
I would put it as a relatively low probability that they would do anything that is dramatically negative but I would still say there are 1 in 3 chances that something could go wrong in the US in terms of reaching a suitable compromise. On the European front, it does not look like the Greek, Italian or Spanish situation is going to blow up and bring down the Euro given that the European Central Bank (ECB) has taken such a proactive stand, so that looks okay and China seems to be on the mend. I think on a global basis, the risk seems contained but the reality is that if we look back over last 2-3 years, every time we thought all the risks were contained, something has either re-appeared or something new has cropped up. So while my current view is that 2013 should hopefully be free of any major blow ups, knowing the amount of leverage that many countries and governments face, I would not want to go too far in saying all risks have been resolved and there is no risk ahead of us in 2013. _PAGEBREAK_ Q: Now that a fiscal deal has been reached, atleast for the time being, how do you think Indian markets will move, we have put in quite a bit of a rally behind us 25 percent in 2012, how constructive would you be at the start of 2013? A: There are 2-3 risks in India we would watch, barring that I think India has a decent year ahead of it. It may not have the sharp rebound from the oversold conditions that we had earlier this year. I think the risks are A] Budget- does the government continues to exercise prudent fiscal discipline, which I think is important. B] Does the government continue to take policy actions that are supportive of growth - fiscal discipline is one of the important elements of that supportive of growth. C] Does inflation remain under control and give Reserve Bank of India (RBI) enough leeway to continue to help the economy. And D] I guess the wildcard is nothing happens on the political front to cause an early election, which could cause some nervousness in markets if that happens earlier than expected. So I think those risks notwithstanding, the Indian market should see continued recovery as the earnings growth of the Indian companies and Indian gross domestic product (GDP) growth should start to rebound moderately in 2014 and those should provide support for the market to work its way up higher. Q: So if you had to talk about specific sectors, sectorally where would you flex your muscles now? A: The financials have been star performers in 2012. I still think that financial sector is in a benign interest rate environment. Select financial stocks will not be affected by what is likely to be further increase in non-performing asset (NPA) - I do not see a disastrous NPA cycle but I think that is a sector that could do well. Other than that, I continue to hope for some action on the infrastructure/coal/power front.  I am not holding my breath and putting a lot of money to work but if something were to happen there, these stocks are so oversold that there is phenomenal upside in some of these stocks if we saw some reform actions come to the front whether it be price relief for some of the power purchase agreements (PPAs) or the fixed price PPAs that were signed between the utilities and state electricity boards. I think oil and gas sector we have got some good news on the oil minister agreeing to let Cairn India proceed with its exploration in their existing oil block. If we see some rational news coming out of oil and gas sector which I think is quite likely, including potentially some indication what gas pricing might do beyond March 2014 then that could be another sector which could be very interesting in 2013. Q: More and more concerns seems to be leaning towards the opinion that this year is going to be sort of top heavy, the first half will get all the good news and market performance as well and then the problems seep in including a political set up that is probably more geared towards the elections, is that your sense of how it may play out? A: I think that is possible. I must admit we have not looked historically at the data, which we need, to understand how the markets normally behave in a couple of quarters leading up to an election, whether the Indian markets outperform or underperform. My assumption is that from an earnings recovery standpoint, the data should get better as we go through the year if the RBI is able to start further easing interest rates and growth rate recovers. From that standpoint, it would seem the market recovery could be more evenly spread out during the year but elections will create some uncertainty and that could make the markets choppy towards the latter part of the year. Q: The year gone-by has been punctuated by phenomenal flows and performance as well, it is our best year since 2009, do you think this kind of money interest may continue in India this year given the performance we have already put down for ourselves? A: I think it could be sustained but there are other issues involved with how much money flows into India. Clearly opening up of cheque book or the balance sheets of the Central Banks particularly in US and Europe has helped feed global liquidity flows going towards risk assets and India has benefitted from that. But I think one of the things India has also benefitted for most of 2012 is that other major markets like China and Brazil were doing badly, so the fund flows tended to be concentrated in a few countries and India was one of the big beneficiaries of that. One of the bigger issues for India in 2013 could be that if China, which has started to rebound strongly in the last few weeks, continues to show signs of recovery then some of the money could be diverted in that direction. That would not mean Indian stocks going down but it may not result in Indian markets being as significant outperformers versus many other emerging markets (EMs). So India could be middle of the pack in 2013 rather than being close to ahead of the pack in 2012. Q: Do you think the RBI will hold on to its anti-inflationary stance in January 29, 2013 policy? A: I think January is a tough call. We have had some benign inflation data but it is still risk out there that inflation may reappear and whether this is temporary or more sustainable. But if I look over 2013, I am thinking 100 basis points (bps) or a little more is possible. The wild card is anything that happens in India or globally in inflation. One of the risk factors that we have not discussed and all policy makers have to keep an eye on 2013, is some kind of action coming out in terms of the Iranian nuclear programme. If either Israel or US attempt to bomb Iranian nuclear facilities, it could cause some turmoil in oil markets and global commodity markets and that could cause some risks to inflation and to global markets in general.