India may see 5-10% correction: Arvind Sanger

Indian market is losing strength with foreign investors fleeing the shore in fear and concern about strong government policy. There may be further bad news as experts feel that May is a month to sell and the Indian market may slip again. Arvind Sanger, Geosphere Capital feels that Indian market may see 5-10% correction from now.

In an interview to CNBC-TV18, he said, "You could get a 10% correction with 5% market correction and 5% rupee correction. Potentially you could get double digits in both which would be really painful, but that would require things to go really bad." According to Sanger, short-term range for the Nifty is likely to be at 5000-5400. He feels that now that no major surprise is seen in fourth quarter corporate earnings, only government's reform measures can push the market to perform. He also warns that there could be a sharp sell-off on policy inaction. Continuing the concerned outlook, Sanger feels that Indian market have lot more to worry about than its global counterpart. "I am more nervous about Indian market than about global markets right now. Global markets have clearly run a bit more than the Indian markets but certainly the economy data in the US continues to be quite supportive," he added. Also read: See uncertainty in May, be stock specific, says Richard Ross Below is the edited transcript of his interview with CNBC-TV18's Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying videos. Q: India has been quite range-bound, but also an underperformer versus its global peers. How are you feeling about equities in this tricky month? Do you still the signs of a correction? A: I am more nervous about Indian markets today than I am about global markets right now. Global markets have run a little bit more than the Indian markets, but certainly the economic data in the US continues to be quite supportive. I think Europe will also remain a risk factor because of elections. Post elections, there could be some risks in France and Greece. But I think India seems to be in a unique problem of its own making. I think a big correction is unlikely because liquidity seems to be plentiful globally. But you could have a modest correction along with more meaningful rupee weakness. That could result in foreign investors seeing much a bigger correction in Indian markets than maybe Indian investors do see. So, you could get a 10% correction with 5% market correction and 5% rupee correction. Potentially, you could get double digits in both. That would be really painful. But that would require things to go really badly. So, our central case is not having that double whammy. But certainly I think both rupee and the market look like they have some challenges. Q: Nifty has been in a very tight range. What’s the range that you see on the Nifty in the near-term? A: My sense would be 5,000-5,400 seems to be the current range depending on positive or negative outcomes. If you get some meaningful policy action, you could have India move up to the upper end or beyond of that range. If you get some negative actions either because of a sharp spike in crude or rupee weakens or otherwise because of anything that government does on policy action, which scares away investors, then you could get below 5,000. I think in the current drift scenario where the government is not doing much positive, but not doing any further damage, things could just drift along and maybe move higher over time as earnings grow. But otherwise there are two risks on the downside. One is oil related and the other is government action related. On the upside, it would be again government action trying to provide some support to the market. Q: How earnings have been trending in this market? A: I think the earnings have been okay. There have been no major disasters or no major positive surprises that would stand out on an overall basis. But you have had some market bellwethers who had some disappointments like Infosys or Reliance. But you have had other companies, on the other hand, that have done much better. So, I think overall earnings are not a big story. From an earnings growth standpoint, maybe we are close to trough in next quarter or two. So that is certainly one reason why it’s hard to get too bearish on India having a sharp pullback from here. But for Indian market to perform from here, it still requires earnings growth to be somewhat more visible. That means we need some visibility on some of these policy actions that we have been talking about because rupee weakening will create some margin pressures for a lot of Indian companies. _PAGEBREAK_ Q: You were making the point about the currency. How much downside risk is it that you see? Do you share the opinion that people have about shock targets like 56-57? Where do you think it’s going to go? A: I think it’s definitely very possible. Given the lack of policy action on the government’s front, I think the real challenge is how do you prevent the rupee from heading there because it continues to rely on portfolio flows to fill the gap. I think one of the most strange debates I have heard coming out of India is how people are blaming gold for the current account deficit. That I think is completely backward because it is trying to blame the effect for the cause. The cause is if you are a saver in India, today you can get negative real returns by putting money in bank deposits, you have a stock market that is going nowhere. So, if there is increased demand for gold, that makes perfectly logical sense for people trying to protect their wealth or maybe people in the traditional sense are buying for weddings. But gold as an asset class makes enormous sense in India. Therefore, rather than the government figuring out how to bring the deficit and inflation under control, how to fix the deficit issues, people seemed to be wasting time on how to reduce the gold demand. I think, therefore, when things are not seeming to happen in terms of policy actions, there is certainly a risk that rupee could have a further sharp sell-off. Q: Clarity on GAAR is likely later this week. What are you expectations on this? How does GAAR hurt the FII flows now? A: I am assuming GAAR is not going to be applied retroactively. So far, they have said they have no intention to apply it to portfolio investors retroactively. If they did apply it retroactively, I think we can be pretty certain of a 10% sell-off at least in the Indian market of that and the rupee getting well past 55. But even if the clarification means that future tax policy is going to be much more onerous, I think that negative impact is already probably priced in, the retroactive is not. So, as long as they give some clarity on how they will treat that and how it will be managed and there is no leeway for the Income Tax Department to have interpretations, which makes life difficult for foreign investors, I think that would be helpful somewhat. But by itself all it does is it prevents money running out, but it doesn’t cause money to come rushing in by clarification. Q: Today, we should hear a final legal word with regards to Indraprastha Gas' (IGL's) petition and the Petroleum and Natural Gas Regulatory Board (PNGRB) recommendations. How are you feeling about this oil and gas space? Do you track it quite carefully and it seems the fear of regulatory interference is the highest here? A: Let’s separate the oil and gas sector from the power sector. The oil and gas sector already has the heavy hand of the government, which keeps things from being too profitable. So, clearly the gas marketing is one area where there wasn’t much regulatory interference. But I think in some senses having some regulations on the pricing, reasonable regulation is actually not unreasonable. I think what’s going on with the oil marketing companies is much worse. What’s going on with any kind of gas marketing regulations is probably fair and needed from a government policy standpoint or a regulatory policy. So, I don’t see that as a negative. Obviously, for the companies who are making a lot of money, it will have short-term negative effect. But we can’t lose out of the fact that monopoly type businesses, government has good reason to have some regulatory oversight, the regulator does. So, that’s fine. On the power sector, overall, I think the regulatory issues are not the concern. The concern is the whole coal pricing and coal availability and the power purchase agreements that have been signed with that. Some people took risk with foreign coal and they are asking for relief which I think the government doesn’t rightly have much sympathy for. But there are others who were relying on domestic coal and who were relying on domestic linkages or their own coal blocks, which were stopped afterwards, and now the government is trying to fix the problem. But it has been very slow in trying to come out with the solutions for those people. Q: In the first three months of the year, we saw high-beta rallying quite a bit, but then in April things turned around and FMCG came back in flavour. Now, as we step into new month, how are you tactically positioning yourself on India, defensive or you are looking to add beta now? A: We are significantly underweight and really staying very small and very much on the sidelines because we have no convictions on which way things will go. Finally, there will be plenty of opportunity to buy, if things clarify in a meaningful way. But right now our confidence level in investing in India is low. Frankly, there are much better opportunities with much better clarity in other parts of the world, so why hitting our head against that brick wall. So, therefore, it’s not something that we are spending a lot of time on. _PAGEBREAK_ Q: What’s your view on crude now? Do you expect it to cool off from current levels of USD 120 per barrel or do you think it’s headed higher? A: I think for the last couple of months we have felt that crude supply-demand fundamentals were clearly becoming less tight. Therefore, crude was one of the least concerning on a fundamental standpoint. There still remains the issue of Iran and what is going to happen there, both in terms of how much of the effect of the sanctions and embargo on oil will have on prices. But I think that is mostly priced in. The supply-demand fundamentals, despite that are not that tight, so therefore crude is staying under USD 120. But second wildcard is if there is any precipitate action by Israel to attack some of the nuclear facilities in Iran then all bets are off. So, barring that kind of an extreme outcome, which we think there is a 30-40% risk that something like that does happen, oil should be relatively contained. But again I said 30-40% probably, so it’s not small. In that case, India could be in real trouble. Even without it if oil stays at about USD 115-120, but the rupee keeps weakening, the Indian deficit goes higher anyway without oil strengthening. So, I think oil is not going to be a headwind most likely, but there is a risk that it could be a big headwind. Q: How are you calling the second half of the year on whether or not you expect to see a big shock for global equities? How do you think emerging markets will come out of it because the first two months is something very different from emerging market performance? A: I am hoping there will be no shocks in the second half. There could be concerns and there could be profit taking. But I don’t think it’s a given that every year we have to have a major macro shock to global markets. But we clearly have to keep an eye on Europe because the political uncertainty about the debate between those want more austerity led by the Germans and those are tired of austerity led by Greeks, but also now potentially the French after this election and the Dutch and the others, I think that could create a lot of uncertainty about where Europe is going. So, it remains a risk. But I think the further along as we go in Europe year-after-year, the risk doesn’t increase it gets smaller. US similarly with growth some of the risks on the budget deficit debate and tax debate will have an effect. But I don’t think they are going to cause a big crash in global equities. But to the extent that they drive risk aversion, the reality is we have seen this already before and we will see it again emerging markets is not where people will go and hide, if there are issues in the US or Europe. Emerging markets are doing a pretty good job of creating their own risks. Therefore, it will still drive risk aversion driving into maybe US bonds or US dollar and maybe gold. I won’t count on emerging market equities necessarily being winners from that.