Year 2013: Sensex may see 15% returns, says Julius Baer

The Indian market witnessed a sharp rally in 2012. The Sensex gained a whooping 24.5 percent. 

In an interview to CNBC-TV18, Mark Shirreff Matthews, head of Asia research at Julius the reforms will be pushed through and that will accelerate the economic growth in India. "I do not think we are going to get another year like this year, but I think we could get 15 percent, including dividends, in the Sensex next year," he asserts. Also read: Sanju Verma sees Sensex at 22K by Mar 2013, suggests bets Below is the edited transcript of his interview with CNBC-TV18`s Mitali Mukherjee and Sonia Shenoy. Q: What kind of base case scenario are you working with now on the fiscal cliff solution? Do you think it’s going to happen by the end of the year or do you think it’s probably going to spill into next year in terms of any potential issue being worked out? A: I felt all along that it is possible, but unlikely. I remain of that view. It's simply not in politicians’ interest to make themselves despised, which is what they will do, if they allow the fiscal cliff to happen because it would provoke a recession. So, more likely, we get some kind of fudging where they do cut spending and raise taxes, but not to a degree to push the economy into recession. You can call that a fiscal ditch, if you would like. But it is not enough to derail the good things that are happening in investment, consumption and property market in the US. Q: How much potential damage do you think this delay can do for global markets? There was a kneejerk reaction on Friday. Is there much more coming, by way of a correction across markets? A: The consensus is saying that it is possible, but unlikely. So, if it does not happen, I think the markets could rally a bit on the back of it not happening. But I think very few people expect it to happen. So, I find this political risk very noisy. If we spend all our time trying to second guess what politicians and central bankers are going to do, we are probably going to get it wrong in many instances. We are probably going to ignore probably what we should be doing, which is looking for good investment opportunities in companies. Q: How are you approaching the next year, given the point you made about this political volatility? Are you more optimistic or cautious about 2013? A: I think there is always political volatility. However, over the last four years, since the global financial crises, the political volatility has expanded dramatically. Infact it has probably doubled. There are companies that do try to quantify it. I think it is safe to say that economic-related political volatility has doubled in the last four-five years. So, we are always going to have bearish news headlines about various political and central bank-related events. But I think underlying it, there is stabilisation in the Chinese economy, continued recovery in United States economy and the European economy, while still in a recession, in much safer territory than it was few months ago. So, actually I am optimistic going into the New Year. Q: India has been an outperformer in this region. How are you calling that market? What is your stance on India going into next year? A: I felt guilty about India because I missed the whole rally up until the reforms were announced in September. And then I changed my mind and became optimistic on the place and still I am. I think India is not alone where politicians tend to only react when their back is pushed against the wall. Politicians in most countries do that way. I am more optimistic than I am pessimistic that the reforms will be pushed through and that will accelerate the economic growth in India. I do not think we are going to get another year like this year, but I think we could get 15 percent, including dividends, in the Sensex next year. Q: The biggest booster for performance has been liquidity. India has got more than its fair share this year. How are you calling liquidity? Is it likely to remain as robust for next year? A: Yes, I think it is possible. Evans’ rule, unlimited QE3, possibly the Europeans doing Outright Monetary Transaction (OMT), likely the Bank of Japan becoming more aggressive in its inflation targeting, it all adds up to more liquidity. What would cause that to be wrong? Simply, a strong recovery in the US economy. But it will have to be really strong. It would have to have quite sudden economic acceleration to get that unemployment rate to come down from 7.7 percent to 6.5 percent in a very short period of time. It could happen, but it will take some time. We will have enough time to react to a sudden acceleration in the US economy. And if that does happen, then I do think we can take away the QE3 and even start to talk about interest rates going up. That would probably be bearish for emerging markets (EMs) and bullish for the US markets. I think we will have ample time to see that thing coming. I do not see that coming right away. Q: What about commodities for next year? Do you think there could be resurgence there because of all the talk from China? A: No, I see commodities flat, at best, for the simple reason that the authorities don't want to keep throwing money at highways and airports. They have enough of them. And they realise as well that to do so would just create inefficiencies. So, what they want to do is put emphasis on the consumer sector, trying to keep up credit to the private enterprises and neither of those really benefit commodities prices. So, commodities, I would say are flat at best.