Answer: Till as long as the liquidity taps are open.
The global economy is not exactly in fine shape but one wouldn't conclude that having a look at equity markets. Analysts say share prices have been driven to multi-year or record highs globally thanks to easy-money policies pursued by central banks.
Comparing the market rally to "riding a tiger", Arvind Sanger of New York-based Geosphere Capital says the European Central Bank and Bank of Japan, battling a slowdown in their economies, have "no option but to keep the liquidity taps open".
In such an environment, the rally should continue at least in the near term.
Even still, Sanger continues to see opportunities in select Indian stocks. "We are still conscious of looking at long-term upside. Stock specific opportunities exist," he told CNBC-TV18, adding that bank and cement stocks looked attractive.
However, even as one can make a money in the short-term riding the market, Sanger said a "great selling opportunity" will present itself when the GST Bill is passed -- a play on the old Wall Street adage: "buy on rumour, sell on news".
Below is the verbatim transcript of Arvind Sanger's interview to Latha Venkatesh, Sonia Shenoy & Anuj Singhal.
Anuj: It has been a strong liquidity driven rally and that continues unabated. Do you get a sense that this equity rally also continues in the month of August?
A: I think that it is hard to see getting derail because of any liquidity moves. So if anything given what is going on in Japan both the fiscal side and potentially the Bank of Japan (BoJ) upping the ante also, it seems as if liquidity is continuing to get pumped into the market whether its BoJ or European Central Bank (ECB), they certainly have no option but to keep liquidity caps open. The Fed is cautiously signalling that at some point it might raise rates again but I do not think a Fed rate rise in September is a very high probability. It is a probability and we will have to watch the data. Therefore, I would argue that for the near term the liquidity rally should continue and in a world of increasingly tepid growth and increasingly lower yields. The stocks that provide growth or they provide yield are likely to get to valuations which are fortunately-unfortunately are going to make historical numbers. On historical basis these stocks will end up looking expensive and that is one of the challenge as how long do you ride this tiger of this market rally, purely liquidity driven but as long as central bankers are riding this tiger of liquidity which they can't get off because they are afraid that the economies will fall apart. I think this dance continues in terms of equity markets continue to remain well supported.
Latha: How are you tackling this challenge then? Since you look at it from the eyes of an investor, are you buying India at current levels?
A: I guess we look to buy specific stocks where we think that have lagged. And so, the reality is no matter what the index is doing, there are always stocks that are still good value in terms of any long-term historical perspective that we look at. So, it is finding those companies with growth opportunities that are not fully discovered.
If you were to look at some of the consumer stocks in India, you are not going to find value. You could argue that some of the IT stocks have fallen down enough to where there could be value there, but there the growth outlook is more uncertain. So, we have to pick our way through some of the midcap stocks and finding some non-banking financial companies (NBFC). Again, many of them have had great moves, but even there, there are some laggards and there are some opportunities as well as specific stocks in different sectors.
So, that is the way we are approaching it. We are still remaining conscious of looking at long-term upside based on a reasonable valuation framework and not letting the current index drive us away from our discipline but therefore, it requires a little more patience, but we are still stepping up and finding opportunities.
Sonia: I take your point that liquidity will be king in the near-term, but in the medium term, earnings slowdown at some point will come back to bite us. So, in that context, how have you read into the earnings season so far and how cautious would you be on that front?
A: Let us separate out two or three different things. Let us look at the banking sector. Let us look at the IT services and companies and I guess pharmaceuticals may fall into that category and then let us look at other companies and other sectors.
I would argue the biggest disappointment has come in probably the IT sector followed to some extent by a couple of pharmaceutical stocks, but I would say that the banks seem to suggest that while things are not getting better in a hurry, they are not getting substantially worse in terms of non-performing assets (NPA) and therefore, the earnings growth story for the non banking financial companies (NBFCs) and the banking sector looks like the clouds are gradually, or at least the sun is starting to become visible through the clouds although it may not be fully out yet. And therefore, I think there are opportunities there.
I think there are some domestic leverage stories. Cement is a sector that continues to show signs of life. There are other sectors in the commercial vehicles (CV), autos, where growth is relatively robust. Power demand has been relatively strong. So, there are sectors where there are still opportunities with numbers. Obviously, not all the numbers are in yet, but the numbers are generally not anything too shabby. There have not been big beats but I do not think there have been huge disappointments either. So, we are seeing macro data that suggests that some of the sectors are turning and over the next quarter we will see more signs of some of these domestic oriented plays are showing further momentum. Although again, the momentum, I will admit, remains somewhat slower to develop that we would have hoped by now. But nevertheless, the trends are positive and if the monsoons signs continue to be very supportive, continue to play out, then monsoon being good will also provide some support both in terms of inflation being a restraint and in terms of growth getting another leg from rural demand.
Anuj: The sector in India which is in an unadulterated bull market is NBFCs; do you get a sense that things are getting overheated here and some of the stocks now trading at three-four times price to book?
A: We have been fans of NBFCs for a while, but some of the NBFCs are getting to those territories where a lot of good news is being discounted. So, the challenge is finding companies that are still struggling. You could take an example, not the one that we own, but Mahindra and Mahindra Financial Services had a tough quarter and the stock has sold off last week. And again, one has to examine whether stocks like that or others where the performance over a period of time has not been that good whether there is a turn or an opportunity in stocks like that. So, I would say that not all NBFCs have run up but some of the more popular ones with the more visible growth have clearly done well.
And so, the challenge is to find ones that are still lagging and seeing whether they deserve to lag and will continue to have problems or whether some of these might see a turn for the better. So yes, as an asset class NBFCs will be one of the best performers on the market and one cannot blindly go and by NBFCs and expect that you are going to find value or make a lot of money over two-three years. But there is still growth and there are still companies with not as extreme valuations.
Latha: Yesterday, we spoke to the CLSA Head of Research and his argument was that this tactical liquidity driven rally could well have more legs. But, over a one year timeframe, he meant over the medium-term, I would not be surprised if returns from now are flat. Do you have those fears?
A: Yes, you could make a lot of money in the short-term because of the liquidity rally in a broad based index sense, but there are many risks along the way. There is an Italian referendum coming up in October, there are major elections whether in the US or in France or Netherlands next year, any of which could result in an outcome in which the new leadership or the new President or the new Prime Minister turns out to be or makes statements or does stuff that causes risk to come off the table whether it is anti-trade or it is anything else that causes.
So, there are a lot of political risks, there are some financial risks, with the European Bank’s stocks melting down, whether there is a crisis blooming there. So, there are risks out there and we cannot take our eye off that. They may not be India specific risks, but they are global risks which could cause Indian market along with other global markets to take a big hit. So, the risk remains that in buying stocks and in buying the market, one has to keep an eye on these risks and to be prepared to take defensive action if any of these risks come to fruition.
Sonia: The big positive trigger at least for most of the market participants is the passage of the goods and services tax (GST) and in that context, we seem to be getting closer to the finish line now. If it does come through, then do you think that will be a big market driver in the near-term?
A: Frankly, if all the other stuff we were talking about not happening, I would say that GST bill passage would be a great selling opportunity because you are going to get a lot of brouhaha about how great it is and I do not disagree that it is going to be great over two-four year period or maybe three-five year period, but over the next one-two years, the implementation, the devil is going to be in the details and it is going to take a while to implement it. And the reality is with all the guarantees that the central government is giving the states. There is a possibility that the fiscal deficit could actually go up as the centre may not be able to get all the money right away in GST collection that has pay out.
So, there are risks so I would say that an euphoria caused entirely or only by GST passage, should probably be faded. But again, it provides more visibility into the long-term. Even for the medium-term one-two years, I do not think it provides much of a help, but in the long-term it provides more support to the India story for those of us who are playing long-term and buying some of the midcap companies which have long-term growth trajectories that are pretty attractive.The Great Diwali Discount!
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