Liquidity party to continue on Japan push: Geosphere

Although US Fed had suggested tapering of QE, it has not perturbed market as other stream of liquidity has opened up, says Arvind Sanger of Geosphere Capital Management. Referring to Japan, Sanger said it has begun pumping liquidity which unleashed rally in various Asian markets including India. But liquidity has not driven silly risk taking in these markets, he asserts in an interview to CNBC-TV18.

Sanger sees China and Europe struggling with subdued growth and says gold has no chance of resuming its rally. Speaking about India, Sanger appreciated finance minister’s efforts in maintaining fiscal discipline and expects market to witness moderate uptrend from hereon. Below is the verbatim transcript of his interview to CNBC-TV18 Q: Do you see this liquidity party lasting through June or are you getting any signs that markets can turn volatile from here after such a good run? A: It is interesting to see what is going on in the US bond market versus Japan and Europe. The US bond market is showing sharp increase in yields in the last few weeks. All the talks coming out of the Fed suggests that liquidity may start being slowly withdrawn by varying the pace of current ongoing QE, in terms of intervention by buying in the bond market. It seems to becoming more and more accepted wisdom that we may start to see some tapering off. It suggests that we maybe starting to see the last stages of this level of liquidity and it will gradually taper off. It is not going to be sub, but on the other hand Japan has just begun its liquidity pumping so there is no sign of that tapering off. European Central Bank (ECB) certainly is in no position to do anything in any form of tightening, although they do not have the same amount of liquidity being pumped in. I think overall it looks like liquidity on a global basis. Going forward, it is looks like it waning a little bit, but the interesting thing is the US market has not reacted negatively. It is not withstanding a couple of days of hiccup to the fact that it maybe ready to withdraw liquidity. At the end of the day it is a very dovish bet, we all know that. It is coming only if the data shows that the recovery is more sustainable. Therefore the liquidity can be withdrawn without causing growth to dry up. Q: This time around Asia has pulled a far less quantity of hot money. It has been more committed money that it has been getting. Would you agree with that? In that context would you expect liquidity to remain more stable in the second half for markets in Asia? A: The good news for the rally to the extent we have had in various markets in Asia and in emerging markets is that the liquidity has not driven silly risk taking. There was a very dramatic improvement in the Japanese market, which has clearly been fuelled by liquidity. However, I think the moment we have seen in emerging markets in Asia has been much more circumspect and much more of a show-me recovery. This is based on where the fundamentals are improving, where can be put money to work, where the earnings are visible and therefore that is what gives me a little more comfort that this is not a liquidity rally. This has been a more modest rally for sure, but it is a rally that looks like it should have more sustainable legs. Again I am assuming that there is not going to be any liquidity shock and negativity on a global basis. However, as liquidity gradually tapers off that should not affect India or Asian emerging markets. If there was any change in liquidity Japan is a market that has probably been most helped by it in the short-term, but that is more Japanese liquidity, other than that I do not think Asia will see much more liquidity around. Q: There are two factors which are moving in opposite direction for global investors for India. One, the commodity complex and how that is expected to move. How do you see gold and silver playing out for India? A: On the commodity front let us separate oil and copper which are more industrial/commercial/consumer and gold which is very much an investment driven commodity. On the commodities which are consumption or growth related which is oil or copper clearly the slowdown in China has been the biggest single driver. That slowdown is continuing to look like it is not going to reverse anytime soon. Therefore that is resulting in those commodities remaining relatively subdued. I do not expect a big crash, but I do not expect any runaway move up. I think Chinese growth and European growth will remain subdued. As a result of China many emerging markets which are commodity exporting countries are remaining weak. All of those factors drive oil prices to under control also partly because the US is seeing sharp growth in production in oil as a result of the shale revolution. So, those factors are all keeping a lid on oil prices and that is good for India. Gold is being helped by actually the signs that Fed is getting ready to withdraw liquidity. At the end of the day gold is dollar denominated and if dollar liquidity is lessening and dollar bond yields are raising those are negative for gold. When money was free and people were concerned that all the money printing had to go somewhere gold was a beneficiary. However, as the Fed liquidity seems to be nearing its end of the current level then gold becomes less desirable commodity in terms of people want to park their money there. Therefore that too remains under a cloud. For gold to rally we would have to see another euro scare or some other scare. Barring that I think India has actually got a very good backdrop in terms of commodity prices remaining benign and helping on a Current Account Deficit (CAD) standpoint. Offsetting that is the rupee itself which again on one hand you have the Fed looking like liquidity is lessening. Thus, the bond yields are moving up in the US. On the other hand Reserve Bank of India (RBI) is expected to cut rates and so the two markets have rate differential which is going to narrow moderately. Inflation differential remains high and therefore the dollar is the commodity that is benefiting from this. Many other currencies are weakening against it and rupee is seeing that too. So, Rs 56 to the dollar is more reflective of other factors rather than liquidity leaving India and therefore rupee is like to crash. That maybe more gradual and manageable as long as gold and oil remain benign. _PAGEBREAK_ Q: By most accounts we are getting a bulk of the money that is allocated for Asia or emerging markets. Tactically what would you prime yourself for in the second half from India, a flat-line kind of performance or do you think the second half is going to be the one where serious gains could be made? A: That is a tricky one on a market call standpoint given the political noise in the second half with the election looming likely to get louder and louder. Frankly, I would have to worry at some point whether fiscal discipline takes a backseat to election posturing. So far the Finance Minister has managed to hold the government's commitment to fiscal discipline, but I always worry about that. My sense is that the market may moderately move up and I think it is going to be more driven by what the economic fundaments look like. Clearly this quarter started off with earnings looking very good, but it is ending the quarter as we have gone through the second half of the earnings season earnings have been somewhat more mixed. What will be important to see is over the next couple of quarters have we troughed in terms of earnings growth and do we start to see earnings recovery and which companies and which sectors do and how does the government deals with some of the major issues. There is a lot of stuff that can happen here. My assumption would be moderate uptrend in the Indian market, but nothing dramatic. It being much more of a stock picker's market than throw a dart and everything is going to go up, because the market is going crazy. I could be proven wrong, but that is the way we are positioning ourselves. Q: You have tracked oil and gas sector for a long time. Is there any optimism building over there? The diesel price increases are coming through. There was more clarity on subsidy shares as well. A: Clearly there is a lot of action. The current Petroleum Minister is probably one of the more dynamic that this sector has seen in a long, long time. Clearly is focusing whatever it takes to restart exploration. It has been ironic and tragic that ham-handed policies by the government have resulted in Indian oil and gas production to be well below what it can and should be. Frankly it led to a larger CAD than need be. So the government is finally facing up to that fact and putting in place policies to fix that. So what we are seeing is actions. Clearly diesel price subsidy helps to reduce the subsidy side. More importantly what is coming is more rational gas pricing policy, more reasonable approvals for exploration without creating too many hurdles for the oil and gas companies, whether it is Cairn drilling in Rajasthan or it is Reliance and its partners drilling offshore. It has been shooting itself in the own foot policy by the government and we are finally seeing a lot of corrective action on that front. We remain optimistic that this is one of the areas which has remaining one of the few where we are seeing policy action unlike a lot of other places like power where there seems to be much slower progress or coal or what have you. Here there is action and obviously Reliance's announcement of its discovery over the weekend was very heartening. That suggests that there is a lot more oil and gas to be found. Clearly they are doing that exploration with the expectation that the gas price is going to be moving up towards a more reasonable level that encourages further investment and similarly is the experience of Cairn and others. Then if the gas price moves up companies like some of the PSUs, like Oil and Natural Gas Corporation (ONGC) and Oil India would be beneficiary. So, there is a lot of good stuff coming and I know there is foot dragging from some of the other ministries which got their heads firmly in the sand hoping that gas prices will be much, much lower to continue to subsidies the fertiliser sector, but at some point it looks like the government is moving towards some of those hard decisions. At least that is our assumption that at this point it has become too difficult to avoid the obvious and that is where we are headed. Q: Do you see this level of 5500 on the Nifty being revisited or broken in the next few months or do you think we have formed a firm base out there for 2013? A: I do not think we are headed back to that level. I think we have passed that stage from the bottoming of the Gross Domestic Product (GDP) growth, earnings growth and all the global pessimism on India. It does not mean that it is going to be straight up from here, there will be volatility. I think 5500 looks like it is a distant downside. At this point we should be looking at a higher range, 5800-5900 on the downside and moving up from there.