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Last Updated : Aug 13, 2015 12:23 PM IST | Source: CNBC-TV18

Cautiously optimistic; soft CPI won't aid mkts: Sanger

Despite the positive macro cues (CPI and IIP), Arvind Sanger of Geosphere Capital Management believes it to be a bottom-up market. While this earnings season was better than the March quarter, it is still not up to the mark, he adds.

With each passing day, the Chinese administered devaluation is decreasing. And while China wants to move towards a market mechanism with yuan, it won't be easy, says Arvind Sanger of Geosphere Capital Management.

"If they do move to a market-based pricing and don't intervene, then yuan has more bets against it, than for it. So, there will be a lot of PBoC intervention as they would want to limit the fall of the yuan," he told CNBC-TV18.

However, shocks from yuan devaluation will reduce in the near term, he adds.

As far as India is concerned, despite the positive macro cues (CPI and IIP), Sanger is cautiously optimistic on India. He believes it to be a bottom-up market. While this earnings season was better than the March quarter, it is still not up to the mark. This coupled with other macro headwinds and the policy paralysis, makes Sanger cautious on the Indian markets.


Sanger believes that the Indian market has already priced in that the GST Bill won't be passed in this Parliamentary session. Today is the last day of the monsoon session.

Below is the verbatim transcript of Arvind Sanger’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Latha: The yuan devaluation today is about 1 percent. With each passing day the amount of administered depreciation is falling and we just have a Chinese People’s Bank of China (PBOC) statement saying that there is no case for continued depreciation. Do you think that now we can see returns or the threat continues?

A: It is an interesting dilemma for the Chinese authorities and PBOC. On the one hand you want to move towards a market mechanism and on other hand you don’t want it to be a disorderly devaluation - on the yuan. So, my sense is that they are caught between a rock and a hard place. If they move to market-based pricing and don't intervene aggressively then yuan has more bets against it than for it and it could devalue further.

However, by intervening they are trying to signal that while they are okay with some modest movements, they don’t want this to be disorderly. So, I think they are going to choose the latter option. There is going to be a lot of intervention as we saw yesterday at the end of the day in the last few minutes they intervened to limit the amount devaluation or the amount of fall in the yuan yesterday. I think we will continue to see some of that. So, hopefully the shocks will dampen in the short-term.

However, it still raises some medium-term and long-term issues of doing three or four percent if that is all China ends up doing, doesn’t help Chinese exports competitiveness enough especially if most of the other emerging market currencies have also weakened. So, it helps them a little bit relative to European and US but it doesn’t help them otherwise. So, it is not enough and yet it causes more currency outflows. So, I am not sure where this leaves China and it leaves a question mark about what they are going to have to do in the medium-term.

Latha: More importantly I wanted to know how you are approaching India at this point in time. We have got a very good inflation number compared to June which was 5.4 percent, this is 3.8. it is almost a 200 basis point fall if you compare it month-on-month (M-o-M). Of course, you have to think of base effect and things like that, but a very good number. Do you think that all this makes it a little more attractive?

A: In itself, it is helpful. But then there is so much other global macro issues with currency wars potentially breaking out and causing currency volatility and weakness and you have the Fed rate hike looming. Inflation being under control is good and helpful, but the lack of visible earnings momentum in Indian corporates and the complete lack of any government action in terms of parliament or otherwise. Now, that will give any confidence are the other headwinds that are negatives for the markets.

So, I think the market is in a trading range and the inflation good news will help provide some support, but in itself, it is not going to cause the market to rally in a big way. So, we remain cautiously optimistic, but we are taking a bottom up approach. We do not see a big macro trade in India and clearly the Chinese devaluation move raises more macro headwinds and therefore raises bigger macro concerns for all emerging markets and India is not immune to that as we have seen in the last few days.

Sonia: The monsoon session of the parliament draws to a close today, if the goods and services tax (GST) bill is not passed, which in all likelihood, it will not be, how much of a damaging impact would you expect to see on India or do you think it is factored in already?

A: I think it is factored in. The market clearly was trying to rally above 8500 and head higher on the Nifty and it has given up all those gains. And obviously there are a few factors behind that. Clearly, the fact that it could not break out above that had partly to do with the lack of any visible positive catalyst that the market could latch on to within India and GST would have been a positive catalyst. Its lack of passage is just, then we are back to worrying about other macro factors as well as country-specific factors and the reality is that the earnings season that just ended or is about to end, it has been a little better than the March quarter, but it has still been nothing to write home about. And therefore, the lack of positive catalysts, certainly GST would have been one, are reasons why the markets get stuck in a trading range. I do not think it causes, by itself it causes a big sell-off in the market.

Latha: The Chinese devaluation is being widely interpreted as an indication that Chinese economy is slower or in bigger trouble than was hither to envisaged and that China would actively use currency as well to stimulate the economy. Now that appears to have set a further bear run in commodities and risk assets, do you therefore think that we are going to be in for a more prolonged fall in commodities like crude?

A: Crude is the one commodity that is probably falling less than other commodities and the places where China has a more direct effect is where it is a low cost producer. So, areas like steel where at the margin they could be benefitting from weaker currency, areas like steel and maybe places like nickel or aluminum are areas where China’s effect is more direct.

Short-term, weak commodity prices, whether it is in China or other countries, cause imported cost to go up and therefore can have a modestly negative effect on demand. However, I think that China is slow and is slowing and we have never believed that gross domestic product (GDP) is statistic so I think the growth is much slower which is why they are having to do this right now. I think it doesn’t necessarily change too much although in the short-term it does have a modest negative effect.

It doesn’t change our view on commodities dramatically. We think oil is oversold but it could go a little lower. I think other commodities remain a little bit more under pressure but oil itself we think is closer to a bottom although it could fall another few dollars but we would be looking for more of a buying opportunity than a selling.

Sonia: So, what is the strategy that investors should adopt now? Now, say until the end of the year? I heard you mention that this is a bottom-up market, should you continue putting money into the Indian market or is it time to raise cash levels?

A: I think it is time to be a little more cautious, because of the unpredictable nature of the macro headwinds. So, from a macro standpoint, I would say that being a little cautious makes sense. From a bottom-up standpoint, I think the sell-off that we could get as a result of global risk-off creates opportunities to buy good companies whose fundamentals are not affected by currency move or by funds flows and therefore I think that that does create opportunities. So, we are going to be a little more patient, whereas last week at current levels, you would have been probably more aggressive, right now we are going to be slightly more selective because we do not know where the macro headwinds are taking us in the short-term.

So, it does cause us to tread a little more cautiously, but it does not cause us to panic and start selling. So, that is not currently our position and our suggestion to investors would be to be a little bit more, keep an eye on global things and not put all the chips on the table too quickly, although there will be opportunities to buy some big companies here.

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First Published on Aug 13, 2015 08:43 am
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