India should outperform once flows come back: Ebrahim

In an interview to CNBC-TV18, Aadil Ebrahim, Managing Director, Bowen Asia says the Chinese economy will struggle for the next year or two because of the deleveraging impact. But India has already slowed down from 8-9 percent to about 4.5-5 percent. Hence, the domestic market has not sold off that much compared to some of the other markets. It has just been the currency that has hit foreigners. "So, the fact is that the domestic market has held up relatively well gives me confidence that when the flows come back, India should outperform being relatively more insulated compared to some of the other markets that have suffered from the Chinese slowdown," he says.

Ebrahim feels good US jobs data may increase the odds of tapering happening a lot sooner, however, poor numbers may keep bond yields lower. He says if numbers come in just about consensus everyone would be happy. 10-year yields have stopped increasing and have sort of stabilized, so US markets are doing okay, he says.
Ebrahim says emerging markets have been crushed due to the massive dollar squeeze and that trend may continue in the short term. According to him, it is important that the 10-year bond yields settles down, if there is an acceleration then more dollar will flow back to the US and emerging markets will suffer further.
Europe, he says, is a mixed bag. Political issues are weighing heavy, with the Portugal government on the brink of a collapse. Elections may be round the corner and there may be a big move against austerity. These are the sort of market concerns that are weighing down sentiments, he says. The global EM basket of market or stocks is trading like 10 times, so it’s a good time to get in and invest for long term. But with China slowing down, investors have a choice to go to the US or Japan, so they are not too bothered with the rest of the EM space because they have domestic opportunities, says Ebrahim. Besides, with Brazil being down 4.5% and issues in Turkey and Egypt, things are not looking too good for emerging markets.
Ebrahim says among IT stocks, Tata Consultancy Services will do worse than Infosys. Accenture too is feeling the pinch now. "Infosys may retest its lows before Murthy came back, especially, if they do cut their guidance," he says. The weak rupee may help but if volume business does not grow, then it won’t matter where the currency is. Also Read: StanChart sees better US job data, weak non-farm payrolls Below is the verbatim transcript of Aadil Ebrahim's interview on CNBC-TV18 Q: What is the sense you are getting in terms of this non-farm payroll number? Can it unleash something as brutal as Federal Open Market Committee (FOMC) or is the market already sitting pretty short in light?
A: It is pretty tough to say because a good number would probably increase the odds of tapering happening a lot sooner, but bad number may keep bond yields lower and the markets may do better. So, it is really a tough call. If number comes in just about consensus, everyone will be happy. But I think atleast the 10 year yields have stopped increasing and they have sort of stabilised. Hence, the US market is actually doing okay. Q: What is your sense in terms of the data coming out of both US and Europe and in terms of what it translates into in terms of liquidity for markets like India?
A: In the US obviously with Bernanke's press conference say a week or week an half ago, I think it is pretty clear that tapering would start and that does not mean the end of liquidity. It just means that the balance sheet will grow at a slower pace and obviously there has been a massive dollar squeeze, lot of emerging markets (EMs) and stock markets have been absolutely crushed and the trend may continue in the short-term.
Till things sort of settle down and the crucial data point is the 10 year, you see that a 10 year settles down. If you see an acceleration in the 10 year, then I think you are still going to see more dollars flowing back into the US and you will see further hit in terms of currencies and EM stocks. But the data point, the data in the US actually looks to be fine.
Europe is still a mixed bag. I think you are seeing some improvement, but again some disappointment, then you are seeing obviously the political issues, Portugal now is looking as if the government is going to collapse, there are going to be fresh elections, say a big move against austerity. I think these are sort of market concerns that are sort of weighing down sentiments.
_PAGEBREAK_ Q: Let me latch on to that statement you are making that US economic numbers look fine. If the US economy indeed continued in its recovery path then although liquidity will take a temporary hit, should not that be equity’s positive? After all it is the mother market that is doing well. So after some downside would you see buying coming back into emerging market equities say later on in 2013 or early 2014?
A: I am seeing some statistics that the global EM basket of market or stocks is trading like 10 times, which is normally a good time to get in and buy for a long-term. But it is a tough call because right now with China slowing down significantly, investors have a choice, they can invest in the US, or can go to Japan. So, right now, they are not too bothered about the rest of the EM space because they have domestic opportunities and I think you want to see till things sort of settle down? When does the liquidity environment improve? When does the 10 year yields stabilise?
So, these are all factors that are floating around. Last night Brazil was whacked down 4.5 percent, which is not great for EM. It looks like the economy is going to slip into a recession, issues in Turkey and Egypt. So, I think right now people are saying hang on a second, we have alternatives, the have the US and Japan. Q: Let us get a bit micro then because in your points one of the top picks is Bajaj Auto and this morning we have seen three or four downgrades on Bajaj Auto, we have seen sales momentum has quite clearly slowed down, is the reason to change your call on that particular stock now?
A: I think in the short-term, obviously they have a strike going on, which has impacted volumes and that obviously hits some of their June numbers. We are not overly concerned on a strike of a couple of days or a week, if this prolongs, they have the ability to shift production. But they have been hit domestically. There has been a slowdown domestically. Their export business is doing absolutely fine, we are not too concerned about that and obviously the margins there are pretty good.
But you need to see the domestic market recovered and boost sentiments and we are struggling now for a good year and half and I think the whole auto industry domestically has been struggling. So, I think maybe if you need to see an improvement in sentiment, maybe continued rains, you may see volumes pick up in September-October-November when the holiday season kicks ahead. So, we are sticking to our position for the time being. Q: What about the basket of EMs that you handle? What do you think can emerge as a relative outperformer when the funds situation or the liquidity flows improve?
A: In terms of our markets. We focus on China, India, and Japan predominantly. I think Japan is doing fine. But I think when the flows do improve - and I think the Chinese economy will obviously struggle for the next year or two as this whole deleveraging impact is happening. But India, already the growth story has slowed down from 8-9 percent to about 4.5-5 percent.
Hence, the domestic market has not sold off that much compared to some of the other markets. It has just been the currency that has hit foreigners. So, the fact is that the domestic market has held up relatively well gives me confidence that when the flows come back, India should outperform being relatively more insulated compared to some of the other markets that have suffered from the Chinese slowdown, hence Brazil, South Africa, Russia and China obviously. Q: Since you spoke about the currency and you do track IT stocks, Infosys in particular. What is your call heading into the earnings season on a stock like Infosys? There is some chatter in the market on whether Infosys will cut its guidance or not? What is your call on the stock?
A: You look at the Accenture numbers they came out a couple of days ago. They are now seeing the impact. They actually were doing quite well, but they are seeing some sort of a slowdown. So, I think Tata Consultancy Services (TCS) should do worse than Infosys, that has already suffered a lot from their higher end consulting book. So, TCS probably will be at risk. So, I think investors holding onto TCS should have to watch their earnings carefully to see what management guidance and what management is saying. I think Infosys may retest its lows before Murthy came back, especially, if they do cut their guidance. The rupee may help, but obviously at the end of the day if their volumes business is not growing then it does not matter where the currency is.