India's macro improving, rupee should gain: Baer's Sama

India's macro-economic environment is showing signs of improvement, feels Alok Sama, President & Founder, Baer Capital Partners. Sama is in the minority camp which feels India's GDP could grow 6 percent in the current fiscal. While macro-economic indicators have stopped worsening, there is little to show that things could get better any time soon.

In an interview with CNBC-TV18, Sama said interest rates in India should start coming down, and that he is bullish on the economy as well as the stock market. If anything, politics is the biggest risk to sentiment, he says. Sama is betting on a 15 percent gain in the market over the next 6-9 months. He is not too worried about the recent slide in the rupee, and says it has more to do with the strengthening of the dollar against other currencies. Sama sees the rupee firming up to 54, or even 50, in the medium term. Speculation that the US Federal Reserve will start withdrawing its monetary stimulus, has unnerved equity investors in markets which have gained from strong global liquidity flows. This has also led a strengthening of the dollar.
Sama feels that the Fed will watch the employment data in the US for at least three months, before reviewing its monetary policy. Below is the verbatim transcript of his interview on CNBC-TV18 Q: The market has been fed on a diet of very strong flows. Do you think all this talk in the environment about Quantitative Easing (QE) will lead to any disruption or are we okay with liquidity for now? A: What is happening with respect to US monetary policy is fairly fundamental to equity markets, actually fairly fundamental to all markets. It is sort of the mother of all monetary experiments never been done. Hitherto people have been talking about exit, in other words Fed reversing course in a matter of few years. Of late it is thanks to some fairly robust data coming out of the US, people are now talking about this in terms of months. To be specific, the Fed has been quite clear that they are focused on the US unemployment numbers more than anything else. Their view seems to be that it would take an absolute minimum of three months of very solid gains, improvements in the unemployment picture for the Fed to contemplate reversing course. At least change the pace of QE and gradually remove it all together. So, if the earliest one could contemplate, if you think in terms of three months of solid data would be the September-October timeframe, more realistically we are talking about next year. Even thinking in those terms has fundamentally altered your average traders; whether you are hedge fund or long term investor your view of the market because this is sort of been back of your mind and now it is very much in front of your mind. It has been a big driver of risk-on trade and you have seen people take a much more cautious view of the markets. It has now become a case of can the fundamentals grow into the current valuations and I believe they can because the picture at least in the US is pretty solid. However, this has implications for global markets including India. You cannot rely on global liquidity and the risk-on trade driven by liquidity continuing into next two-three years. One needs to go back and focus on fundamentals. I hate to use the expression but we are back to the notion of ‘coupling and de-coupling’. Individual markets, sectors and even companies, the kind of valuations based on fundamentals as it should be. Getting beyond the distortions caused by complete unprecedented degree of liquidity that has been created by central banks. Q: We have also got Gross domestic product (GDP) figures due today. What do you expect to see from that performance and how are you feeling generally about the Indian macros and how they have been shaping up? A: With India over the last two years in particular, it has been a stagflation like scenario. You had on one had a growth recession. You had GDP growth, which moved from 8-9 percent per annum trajectory to a 5-6 percent. On other hand you had consumer price index (CPI) inflation at 9 percent. We see a gradual reversal in that. In other words growth in 2012-13 might be 5 percent. We see a gradual improvement in that to say 6 percent in the current fiscal year; Likewise inflation going from 9 percent to an area of 6 percent. So complete reversal of that. In order words GDP accelerating and inflation coming down and that in turn has the corollary of RBI having a little more leeway to reduce rates. So we expect policy rates to come down by a minimum of 50 bps in current fiscal year. I think there has been an improvement in fiscal picture given the cut back in expenditures and other steps the government has taken. There is also an improvement in current account deficit (CAD) and price of commodities oil and gold in particular, in terms of prices coming down that has helped CAD picture . So, if you put all that together then the macro outlook for India is certainly an improving one and that is a backdrop in terms of thinking about the Indian markets.
_PAGEBREAK_ Q: What is your view on the market in India post the recent consolidation that we have had? Do you think it is the macros which will continue to lead market performance? A: Again going back to macro outlook, we are constructive on Indian macros and by extension we are constructive on the markets. We do think that while there has been a pull back that it is reasonable to expect a 15 percent upside in markets in the next six-nine months. That is a function of improving macro outlook and assumes that global liquidity picture stays stable. We don't expect any sort of tail risk type of outcomes that one was so fixated on. The main headwind one faces in India is frankly politics more than anything else. There is an acceptance that India is condemned to an era of unstable coalition politics in the foreseeable future and I am talking about next four-five years. The only question is will the next government be even more unstable coalition than the current one. There are some extreme outcomes around that that could really rock the boat. However, our base case is the market is reasonably valued. The earnings have hit a trough, bottomed out and growth outlook is reasonable in context of an improving macro outlook and that causes us to be constructive on India. Q: What is disconcerting is the way the rupee is moving, lows close since July last year. What have you made of this kind of continued weakness we have seen on our currency? A: What has happened with the rupee of late is more a function of dollar strength. I think peoples’ fixation on a QE reversal and the natural implication of that would be a stronger UD dollar. So, people have positioned themselves in a fairly bullish fashion with respect to the US dollar across the board and that has hurt the rupee. So, it has been much more that than any other India specific factor. Our base case is solid flows into equity markets; so on capital account you have got solid inflows, and an improving CAD picture which is driven by lower commodity prices more than anything else. When you put that together, rupee around 54-55 is probably reasonable. Maybe even down to 50, if things continue to improve at even a better pace in India. Things are possibly a little bit overdone and I am not saying it couldn’t get to 57-58 but to my mind that is a bit of an overshoot.