Applaud RBI Guv's efforts to tame inflation: PIMCO

In an interview to CNBC-TV18, Masha Gordon of PIMCO gave her reading of the global markets and her outlook on Indian equities.

Below is an edited transcript of her interview on CNBC-TV18 Q: Do you concur with the view that we will continue to see benign liquidity across global markets as the Federal Reserve (Fed) looks all set to defer tapering into 2014?
A: We are operating in the environment of weak growth globally and clearly still we are working in the environment of rate normalisation. So the first thing spells out policy rates that stay on hold for a lot longer, the latter clearly spells out the point that at some point we will see tapering.
Now, we are expecting tapering no earlier than March when Chairwoman Janet Yellen takes the helm of the Fed. Clearly, the battle between the data and rate normalisation process will be taking hold. We should expect fairly benign liquidity scenario midterm, punctuated by spikes of volatility as the market contemplates the notion of rate normalisation. Q: Do you think the global equity markets can build on their record highs and what would be the triggers for this continued momentum in 2014?
A: It will very much depend on growth. So the Fed is signaling to go into riskier assets and this has underpinned a number of developed markets. We have seen very strong ratings of the US markets, underpinned someone by a better earnings trajectory. Recently we have seen the re-rating of the European markets where the earnings story is yet to come.
The trajectory for the coming year will be dependent on growth and the trade-off between the capital and labour in the US. Should we see continued benign trade-off, in other words labour remaining flexible and plentiful, we should see the corporates performing well and leveraging that in margins. The point of fear in the US is that the margins are at a historically high level and it is a question whether that sort of profitability could persist for longer given where we are in the cycle or the labour takes an upper hand Q: What is your view on Indian market? We have seen strong foreign institutional investor (FII) flows and macro factors are improving as well. The new RBI governor is making attempts to cure inflation problem as well. How would you read into that?
A: We have used the opportunity to add our positions in private sector banks. We felt that was an interesting opportunity given the very sharp sell down in those names. We continue to hold franchises like Tata Motors where the domicile is not indicative of the quality of the business.
For us, to become more bullish on India, we need to see a responsible fiscal policy come in through to get more enthused about the long-term fundamentals. Market is still trading at 15 times earnings, it has experienced earnings downturn over past two years and rates were too low for savers and too high for the corporates. RBI is addressing that problem but we need the help and corporation of the fiscal side and that is a post election story. Also Read: Don't see liquidity as a tool to fight inflation: Rajan Q: The Indian market is just 1 percent away from all-time high. Are you expecting the markets to build on those gains as we head into elections? Are you positive on India now?
A: I am cautiously optimistic on foundation that RBI has created. As a dollar investor, it is irrelevant to me what the market has done in rupee terms. I would have lost money relative to other markets investing in India and not hedge in my currency and hedging in Indian currency is very expensive.
What is important is to see the innings of the change on fiscal policymaking and as you know the prediction of election outcome is fraught with mistakes. So I would use market volatility to built position in companies that are less dependent like Tata Motors or some banks, should they go back to the positions of extreme oversold situations like we have seen two months ago. That will be my strategy. Q: What is the FII view on India? Is it the long only funds or more tactical ETF hot money that is putting money into India?
A: The long-only investors love to love India. A symptom of that would have been long-only investors being net investors in the country when policy mix was toxic. Now these people have added on the margin and more recent flows might have been from community that is playing tapering or lack of tapering.
We have bought ourselves six months time. Should RBI governor continue his impressive policymaking, express independence and should we see more fiscal containment that would buy India time and hopefully keep the money in at the time when rate normalisation fears will resurface again. Q: What did you make of the RBI policy yesterday?
A: We applaud the RBI Governor's resolve to establish a strong inflation anchoring with probably taking the brunt of the corporate sector that probably doesn’t like the move. It is important for a country to have high savings rate and in India the rates were too low to incentivize savings and too high to incentivize investment. So you need to have a balance and root people towards owning financial assets rather than investing in gold. The RBI governor has done just that.
He has accompanied that move with increasing liquidity available to the banking sector and that is a relief and that should mean that banks are less troubled and as investment demands come through, banks may be in a better position to lend.