Downswing a 'correction not systemic crash': Bain Cap MD

In an interview with CNBC-TV18, Steve Pagliuca, MD, Bain Capital, said that the ongoing market downswing was more a correction rather than a systemic crash and said that he thinks the Chinese economy is vibrant enough to withstand any shocks.He further said that the oil rout was a huge benefit for the world economy, benefits of which would show up soon.Below is transcript of the interview on CNBC-TV18.Q: I wanted to know what you make of the volatility we have seen in markets or in fact why volatility the downward spiral these last few weeks?A: When we talked last year I think we encapsulated the discussion by saying that it was a year to proceed with caution because the markets were valued highly. So, what you are seeing now is a correction if had to guess, not a systemic meltdown. I don't see any evidence of bad loans or subprime or some of the things that drove the 2008 crisis. I think it is a correction. The S&P levels I think as of today are about at the median of what they have been for a long period of time. So, it is a correction not a systemic crash in my opinion.In private equity we are fortunate that we can take the long view and so our companies values don't fluctuate up and down with the daily market price. We buy companies to build them and transform them from long term and we can at the end take them public or sell them strategic at the right time for the company and for the shareholders.Q: You said that you did not think this was systemic but there are many underlying structural fears, there is of course China and crude oil and commodity prices, that is already playing out. However there does seem to be the buzz here that maybe the US is headed towards a recession as well. I am just trying to get a sense from you on where you see the global economy headed in 2016 and therefore then what is the investing strategy, where do you see growth come in, where would you be looking to put money in?A: There is no question that the China situation of having a slower growth has impacted the markets. Now when you step back it is still 6.5-7 percent growth, that is still healthy growth rate compared to many places in the world and I would argue that 15 percent was sustainable for long period of time, they did a fantastic job. They have always managed their economy very well. I was in China about three weeks ago and really it is still bustling. It is an economy that is transitioning as many have from a export, manufacturing driven economy which was service economy and the services side is really growing and that is really propping up that GDP growth. I think they are doing the right things. Again I haven’t seen any systemic financial issues with the banks, they are as strong as they have ever been. They would in fact say some of this market volatility is because the banks are so capitalised now that they can't buy assets like equities or riskier assets, they get penalised against their cost of capital. So, there is less liquidity in the market and with less liquidity that causes more volatility. So, the banks are very stable.They have made energy loans and the CEOs I have talked to they are not to an excess, they are well diversified, many of them are to big companies. So, I do not see systemic crash, I see a correction. Then for private equity where are we looking? We look at things like technology, how that is changing the world. We have looked at financial services companies, payments companies, we did Worldpay, we talked about that 4-5 years ago, that has been successfully taken public now and it is a very powerful company in payments. We have extended that into other companies in Europe as well, in Italy. So, I think payment space, technology space is a great place to look. Unites States healthcare, certainly healthcare provision systems, technology to make healthcare better, faster, quicker, you look at those kind of things. Also what people I don't think are thinking of about is with oil prices going down so much, I think from 18 months ago we are down something like USD 70 per barrel, in the USD 30 now, that is a gigantic dividend for the world. You have moved by USD 70 per barrel, by the amount of barrels that the world consumes that is a huge number and a dividend and people will use that to invest, to pay off loans and that would be really positive because that is a big factor of production in the US as well.Q: That has not as yet and that is the most perplexing thing people are talking about that at these levels of oil prices consumption should have moved up much faster, unfortunately that isn’t happening?A: People are paying down debt, people are saving because people are living longer for retirement and we had a big crisis to come out of. When we talked in 2009 we said we can't solve this thing in one or two years, it is going to take 6-8 years quantitative easing and savers saving. So, that is what is happening right now. However that will reverse itself, that money will come back. So, if these prices stay down low that is a good thing. If we step back, part of the stock market is general correction because it has been at 98 percent oil level, not the 50 percent oil level in terms of multiples. Secondly people are saying the oil thing has two impacts, one, there are loans to oil companies that could go bad.Two, they are cutting back on capex and direct imply is on oil services. I think over the longer term those dynamics are going to be outweighed by the fact that the low cost of oil is good for the world and good for the economy and is going to create a dividend.