In an interview to CNBC-TV18, Arvind Sanger, Managing Partner at Geosphere Capital Management shared his readings and outlook on the global markets.
Below is the verbatim transcript of the interview.
Anuj: What is your sense? Do you think the issue of Donald Trump could snowball into something major and could lead to first major correction of 2017 or as usual do you think it will be an irritant which will pass and will provide good buying opportunity?
A: I think short-term VIX has got into too low and complacency not just in the US but global markets, you were mentioning earlier the India VIX also was at multiyear lows. So you had some extreme complacency and I think markets are always like clockwork; something or the other comes along to shatter that complacency. So first of all that was overdue that markets when they get so complacent, it takes very little to shake them out but the question is is this very little or is this a lot.
My view is that this special council being appointed. Is that actually probably best news is the short-term and probably in the next 24 to 48 hours we expect new FBI head will be announced by the President. So all of these things will put some kind of stability beyond this current brouhaha going on and special council is going to take months to do the investigation. So nothing is going to happen right away. In the meantime there will be some congressional hearings and some discussion about the memo that James Comey wrote and what have you but the short-term fear that something is going to go out of control here in the political system may have been halted by the announcement of the special council because that is going to take months for anything to happen there. So it will actually slow this process of Washington going into easily. So in that sense if you get a big selloff over the next day or two, we would be buyers of that sell-off because we think while the Trump agenda and the tax cut and all of that still remains at risk because of these long-term issues but the short-term fear that there is impeachment and all the other stuffs on the horizon - that is overdone.
Latha: In a way you have answered a part of my question. My point is will the global markets and investors start fearing that the big tax reform and hence the growth in earnings that was factored in from November 8, will that recede a goodish bit of a fear that because of this noise those reforms get postponed?
A: There are two separate things. One, what were the aspects of the Trump agenda that the market astounding on and after Trump election one of the arguments you could have made is that one of the expectation was protectionism which will be bad for global markets. So that seems to have gone off and one of the risks I see emerging is that if Trump gets back to the wall, does he go back to -- it is hard to get stuffs through Congress but protectionism is easier for President to pullout. So if I were to worry about things - that's one of the things I would worry about that if Trump is feeling like he needs to rally his base protectionism, could be a way to get that but that is not my central case.
My central case is, he still recognises that tax reform is important thing and with special council and other things like that cause the temperature in Washington to cool down then maybe the emphasis can go back on that. So any sell-off here would probably reflect greater recognition and probability of tax reform is certain as the market seems to believe but there is another aspect, the earnings reports this quarter for the S&P were the best in over two years. So don't just think of this as totally hope driven rally. There were also some signs that the economic or the earnings recovery was coming along and similar thing applies to India or other markets. You are seeing actual growth recovery which is different from just purely hope. So there is little bit of hope in valuations but there are a lot of fundamentals in the earnings.
Sonia: You mentioned that it will take months for any kind of political upheaval if at all but with the new US government you can never say never. The rally has been about 13 percent since Donald Trump was elected, worse case, if there is an announcement of an impeachment, what kind of selloff are you expecting to see. Will all the gains be taken away or do you think that the market will once again focus on earnings and it may just be a minor correction at worst?
A: I think impeachment is a very low probability in the next three months. So we are talking about something that if we were to have news come out that the special prosecutor digs up about collusion with Russia and that kind of stuff - that is going to cause impeachment. The fact that Donald Trump had somewhat lose lips in the meeting with the Russians is not an impeachable offence but let's assume that your question that impeachment is on the horizon then the market takes a beating because it creates a lot more uncertainty about policy, about decision making, about how the new President, if Mike Pence were to become the President. So that causes a bigger selloff in the market, you could get easily a 10 percent pullback in the S&P and that would have a similar effect on global markets but I think what is going to play out here is noise in Congress about what was in the Comey memo but if he appoints a good person to the FBI and with a special council, so some of those things can get recede but people are now coming to the fact that Trump's presidency is going to be very volatile with a lot of undisciplined noise coming out of Trump's White House. Therefore, I think that investors have to get use to that and that is going to create some market volatility but I do not think that is going to create a sustained selloff, sort of something coming out that causes impeachment.
Anuj: A word on Indian market internal as well. We are at the close of earning season. Your overall thoughts on how that has been. We have seen some green shoots, there have been a couple of disappointments of course but in general are you happy?
A: Yes. I think this quarter even though there was some leftover effect of demonetisation in some of the companies and some of the financials, overall it seems like things are turning the corner and the earnings recovery that we should have expected, more clearly visible in the December quarter is now becoming visible in the March quarter and as we believed all along, fiscal 18 is shaping up to be an year where we could easily see 15-20 percent earnings growth across most domestic sectors and that is a reason for the rally and that will provide legs to the rally. So obviously the market is not cheap but between the funds flow coming into the market which we think is going to surprise people with the magnitude of domestic money driving the market and an earnings story that should continue again better and hope and expectation that the goods and services tax (GST) will drive, not withstanding any short-term volatility further growth into FY19 which can drive further upside. I think this market, any pullbacks in our opinion are buying opportunities unless something fundamentally changes which I do not think the news out of Washington fundamentally changes.
Latha: Steel was the most hated sector even a few months back but now do you get a sense that growth is very real and even economy facing stocks like steel merit a look in?
A: I think yes, demand is very strong. Steel is a sector that notwithstanding some of the antidumping and other measures to help the industry is still somewhat dependent on China but China's demand is seeing a little weakness short-term but China's demand is overall doing better than we expected, so that is an important backdrop. Let us not forget that half of the world's steel capacity sits in China. So no matter what Indian demand is doing, you also have to take that into account when you are looking at steel as a sector but the domestic steel demand is a good sign. It is a good sign for the steel industry but it is a good sign for other domestic facing sectors in the infrastructure and construction and capex based. So certainly it points to some of the things that we have been talking about. Cement has done very well but even some of these other sectors that have lagged could start to see some signs of life.
Sonia: Apart from the domestic consumption story, what more would you be looking to buy in this market because there are plenty of other pockets which are also picking up?
A: I think that some of the banks that have lagged to the extent that Reserve Bank of India (RBI) is able to, with its new policy tools at its disposal, move forward some of the non-performing asset (NPA) resolution then that is an area where the economic recovery and capex recovery coupled with putting some stability behind the existing bad loans and then seeing loan growth come back could be beneficial for some of the lagging private sector banks as well as some of the better public sector banks. So that is an area that we are finding more interesting right now.
Anuj: A bit of a follow-up. I wanted your thoughts on how the market has treated the Yes Bank issue where there was divergence of NPAs, of course for the last financial year but the market hasn't been kind and we have seen some kind of foreign institutional investor (FII) selling, since you spoke about banks. How would you approach that and do you think this could turn into a bit of a trigger for correction?
A: This is a market where credibility of management and quality of companies, earnings reports and quality of the believability of management and earnings is still very important even though the market is making new highs, this is a very bifurcated market in that regard and any company or bank that raises any questions, I guess gets punished sometimes disproportionately but that maybe the example of what Yes Bank is suffering. I do not think it is a broader market wide issue. It is more a question of - people are willing to pay much higher multiples for quality and are willing to bypass companies even if they look attractive if there are any doubts about the earnings quality.
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