India trading cheap; further mkt upmove likely: HSBC

As the Chairman of the US Federal Reserve kept the door open for further stimulus, global markets showed a mixed reaction. While the US market rallied, Asian markets were quiet. Philip Poole of HSBC believes there is an increasing likelihood of further stimulus from the Fed. But, the announcement for a bond buying programme is unlikely during the ECB meet on September 6, he feels.

However, risk-on continues on global central bank easing, added Poole. According to him, currently India valuations are lower than long-term averages and he likes China and Russia in the emerging markets' basket. Besides, he prefers the consumer discretionary stocks over staples in India.

Poole is also hopeful of further upmove in India, given the price/book multiples. He also hails the clarity on GAAR as a positive move for investment sentiment.

Also read: No chance of QE in September FOMC: Morgan Stanley

Big credibility test looms for ECB and Draghi

Here is the edited transcript of the interview on CNBC-TV18.

Q: How would you read what Bernanke had to say, it is mix reactions in the markets, Wall Street had a fairly runaway rally, Asian markets are quiet, would you say that there could be stimulus within the year itself?

A: Yes, I think it is becoming increasingly likely that we will see additional stimulus from the Fed. But the problem is that the transmission mechanism throughout the real economy is broken. Monetary policy is already very loose. It can get looser but, it is not having much of an impact on the real economy. I don't see that changing.

Q: So the risk-on that we have seen for the past several weeks, does it stay or does it peter out?

A: One of the issues is that we have seen data disappointing since February relative to expectations. I think we have seen something of a turn in the US over the last few weeks. That is supportive of a continued risk-on mood and frankly, if the Fed does move and that is likely to support that risk-on environment. But my point is that, in reality it doesn't make much of the difference to the real economy. So risk-on, risk-off clearly affects markets but the underlying concern about that global recovery is still going to be there.

Q: You are here on client meetings in India but give us a sense in terms of your strategy, what you are promoting on a global basis as well as how exactly are you placed on the Indian markets?

A: If you step back and you look at long-term returns then equity markets have outperformed fixed income markets on a 30-50 year basis. Emerging markets over the last 20 years have outperformed developed markets. We think those trends still make a lot of sense.

We are arguing that if you are a long-term investor, you should be using the weakness that we have seen and continue to see on this risk-on, risk-off type move to get access to fundamentally sound investment ideas with equities looking cheap relative to bonds. That really is the key call.

In terms of India, India is trading cheap, relative to its long-term averages, on a P/E on a price to book basis as well. We think that rupee looks one of the cheapest emerging currencies in the world and that is obviously from a foreign investor point of view very interesting. Money is coming into the Indian market.

In contrast for example to China, Chinese market has fallen by 6-7% depending on which index you look, in dollar terms so far this year whereas India is up 12-13%. There has been a big difference.

We like China as well, we like Russia but we think India is also interesting particularly discretionary consumer stocks, some of the financial stocks for example materials, industrials because we think the cycle in a sense is turning, the economy is probably bottoming and we will see rate cuts coming through at some point.

_PAGEBREAK_

Q: There is an argument that the sectors you mentioned, consumer staples and private banks and financial stocks have run up a bit too much and ultimately, private banks are exposed to the same economy that the public sector banks were exposed to. Now we are beginning to see some kind of creaming off especially in private sector banks, you don't think that is a worry?

A: First of all on the consumer side, it is the discretionary stocks that we like rather than the staples and they still look good from a valuation point of view. We have seen the markets run back up having come up a lot including some of the financials. We need to be careful on stock selection there, it is true but on balance that is still the view that we take.

Q: The other argument we have had for the Indian markets recently is the bipolarization that we have seen in markets. For example, infrastructure stocks have completely decelerated, vis-à-vis FMCG or consumer discretionary, which you spoke about, would you think it would be a prudent call to invest a certain amount possibly in stocks which possibly could see a further upside in terms of cheaper valuations as opposed to higher valuations?

A: The screen that we generally use in a stock selection process across all of our funds is price to book versus return on equities. In other words, we try to buy things that are cheap in their own valuation cycle and sell them or at least reduce the overweight when they pick up on a valuation basis. So if things look cheap and we don't see any fundamental reason for them getting cheaper in the short-term, then it makes sense to adjust and I think there is an argument to be made on that basis.

Q: Any stocks that you can talk about or recommend?

A: I don't want to talk about individual stocks but as I said from a sector point of view, we still see a lot of value in some of the discretionary consumer stocks, in some of the financials, materials and some of the industrials related to the domestic cycle because we think that cycle is turning and the demand will be coming back.

Q: Could you throw some light on how exactly the European situation is at this point in time and do you think that we have possibly troughed out in Europe or are we working with some sort of risk factors maybe something as Greece exiting the euro? Is that a possibility or is the worst over?

A: I think the first thing to say is that this is a long-term debt workout situation. If you take the experience of Japan, you take the experience of the emerging markets in that crisis, it takes 10 years plus to deal with a problem like this. We need to see it in that context.

There has been some progress. I think the progress is clearer now than it was six months ago. In the banking sector for example, recapitalization of the Spanish banks is very important, but it’s also clear that eurozone governments are still struggling to get their act together. There are very different views inside the eurozone and the coordination between eurozone governments and the ECB is also lacking.

We still have a number of problems on the table. There is a big focus on what Draghi will say and what ECB will do. I think probably too much of a short-term focus, because in reality we will probably see a few more details, but not the announcement of the bond buying program that the market wants to see.

The market always builds itself up and then is let down by the fact that things always takes longer. But in my view it's a muddle through type of scenario. We are not expecting the eurozone to breakup. We are expecting it to be a difficult transitional period towards a new equilibrium, towards a new growth model for countries like Spain, Italy and obviously Greece has got a long way to go in its adjustment program as well.

Q: The Anti-Avoidance Rules have not exactly gotten tweaked, but at least the fear has been put off by the Parthasarathi Shome Panel recommendations that have come in. You may have been briefed as to the main takeaways of that panel. They are still recommendations, but they recommend a three year deferment of the entire regime. Have you heard enough positives from that report to expect that foreign investors will now perhaps come back, take a more serious look in?

A: Foreign investors on balance of course have been putting money back into the market already despite the lack of clarity. So more clarity helps. It would have been better from a foreign investor's point of view not to have had this whole debate in the first place. It's really muddied the waters. But it's become clearer, so I think on that basis foreign investors who are concerned about it now understand more clearly what it means and would take a view on that.

But, for me, the more important driver is really related to policy more generally, the extent to which valuations still look attractive in certain sectors and from the point of view of the rupee clearly it still looks attractive.

_PAGEBREAK_

Q: The Anti-Avoidance Rules have not exactly gotten tweaked, but at least the fear has been put off by the Parthasarathi Shome Panel recommendations that have come in. You may have been briefed as to the main takeaways of that panel. They are still recommendations, but they recommend a three year deferment of the entire regime. Have you heard enough positives from that report to expect that foreign investors will now perhaps come back, take a more serious look in?

A: Foreign investors on balance of course have been putting money back into the market already despite the lack of clarity. So more clarity helps. It would have been better from a foreign investor’s point of view not to have had this whole debate in the first place. It’s really muddied the waters. But it’s become clearer, so I think on that basis foreign investors who are concerned about it now understand more clearly what it means and would take a view on that.

But, for me, the more important driver is really related to policy more generally, the extent to which valuations still look attractive in certain sectors and from the point of view of the rupee clearly it still looks attractive.

Q: How are you looking at crude? We have seen it flyaway and it’s a very important parameter for Indian earnings, GDP, current account, just about every parameter. Do you think that we are going to see it continue in this bullish phase or do you think the longer term view or a one year, two year view is sub-USD 100 for Brent?

A: No, I think there is a floor for Brent. There is a floor for oil prices globally based on geopolitical concerns in the Middle East which are not going to go away. Those concerns are here to stay for the foreseeable future. I think that provides a floor. The downside risk is clearly that the Chinese economy for example, weakens further, the US growth continues to be disappointing. But I think there is a floor there which will keep crude supported in a relatively narrow trading range.

Q: What is your view on the euro? What level you see as a sustainable average?

A: I think the euro arguably should be weaker than it currently is. If you look on a Purchasing Power Parity (PPP) basis, it still looks slightly expensive relative to the dollar. I don't think that makes a lot of sense given the fundamentals and so I think in the longer term probably the euro will weaken, but not dramatically so. We take that there is this muddle through scenario rather than some kind of inflation.