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Last Updated : Nov 04, 2014 11:16 AM IST | Source: CNBC-TV18

India only bright spot; bullish on auto, banks: Geosphere

According to Sanger, there is surplus liquidity in the world and scarcity of growth and India is the only bright spot. Its GDP is expected to move from 5 percent to 6.5 percent in the next few years. He says the outlook for India has improved in past few months.

The current rally in the Indian market is more of a hope and expectation rally, says Arvind Sanger of Geosphere Capital. Despite the poor core sector data that came out on Friday and poor auto sales data, he believes these numbers to be abberational. He is surprised that consumer sales numbers did not pick up in the festive season.

However, he adds that after a while, the hope rally will fade and the effects of growth will need to be seen in terms of the economic data coming out – whether in terms of rise in consumer spending or on the industrial side, capex side. Sanger says it will take a little longer to see growth in terms of capex, but he expects quicker turnaround on the consumer spending front. Due to the base effect, benign numbers are expected on the inflation side, he adds.

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Going ahead, he expects positive economic data as the backdrop continues to be favourable for the Indian economy in terms of lower diesel prices and inflation.

According to Sanger, there is surplus liquidity in the world and scarcity of growth and India is the only bright spot. Its GDP is expected to move from 5 percent to 6.5 percent in the next few years. He says the outlook for India has improved in past few months. However, he expects to see more volatility in the Indian market.

He says though bank stocks have moved up, there is still room for further upside if economic growth and loan growth shoots up. He also continues to be bullish on auto stocks despite the weak data and believes commercial vehicles sector to be a great place to be in.

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

Latha: We had core sector numbers for September, which looked pathetic, much worse compared to August that is and we had auto sales numbers for the month of Diwali and yet not looking very impressive at all. Will at some point the fundamentals of growth quell the enthusiasm created by liquidity?

A: Right now we have kind of a hope and an expectation rally but we have to see the economic data follow. I believe for a while that India has some time and some running room but that time is not unlimited. So as we get towards the end of the calendar year, people are going to want to see signs of growth.

Clearly, the inflation side - the base effect is going to show some very benign numbers over the next couple of months but on the growth side, we have to see this confidence that we hear about translate into actual economic reality, whether it is in terms of consumer spending where I thought some of the early data on pre-Diwali sales were looking quite encouraging. So it is a little surprising that the numbers did not follow through.

I think the industrial side, the capex cycle is likely to take a little longer to develop because that has certain lag effect of decisions that are getting cleared resulting in actual capex but on the consumer side, I would expect to see some quicker turnaround especially with oil having fallen as much as it has and diesel. So I am still optimistic that all the backdrop is so favourable in terms of lower diesel prices, in terms of lower inflation and in terms of general feel good in the country, it would be very hard to imagine that this was not an aberration number and we are not going to get more follow-through of the positive data coming through but you cannot keep expecting that without some follow-through sooner or later.

Sonia: What does an average Indian investor do now? At almost 28,000 on the Sensex, is this still a market that one should buy?

A: I have a simple view that there is a surplus of liquidity in the world and there is a scarcity of growth. You were talking earlier about Chinese growth, I would say that if China's real numbers are even 5 percent that would be a positive surprise. So China’s real growth not what they report is substantially below what people think, so other than the US where for developed market to have more than 3 percent growth is pretty amazing, the only bright spot that people are counting among major markets in the world is India where the growth rate is in the mid-5 percent and is expected to get to 6.5-7 percent.

So, I would say strap yourself in, this thing could get crazy, in terms of - if global liquidity is around, I am not sure where the Indian market could go over the next 12 months, obviously over the next couple of months where the data comes, I don’t know but if our expectations of improving fundamentals because of just the cyclical recovery, the backdrop of lower commodity prices and government positive action - things could continue to ripe but there is going to be volatility around the way and certainly European lack of growth and continued debate about what they are going to do on expanding QE is one of those.

Latha: Would there be a seller strike now? Do you think the bottom of this market has moved up, would you have the courage to sell?

A: I think so. We were buying on Friday. I think that when Bank of Japan is opening the spigots then the one fear that we have, which was what happens when Fed withdraws liquidity is now being offset by another liquidity source. What are the risk factors? The risk factors are liquidity going away and that leading to buyers strike or buyers withdrawing or alternately any major growth scare on a global basis and growth scare is there in Europe but therefore people want growth more desperately. So yes, I think that clearly the outlook for India has moved up and if we are all surprised and growth doesn’t follow then all bets are off and I find it very hard to imagine that Indian growth is not going to continue to trend up. So Friday’s data was abberational.

Sonia: What should one be doing with some of these domestic growth stories like autos, banks, some of the capital goods names etc because they have run up far ahead of the growth?

A: That is always a challenge - finding the companies where we can make big market calls but at the end of the day it is about buying stocks. So we have to find stocks that are reasonable where the fundamentals are not fully reflected and so I think banks have moved up but I think there is room for upside. If you get the growth cycle and the borrowing cycle which has been pretty tepid in terms of loan growth, if that starts to recover, I think there is upside.

I would say, the auto names, some of them like Maruti and others have run a lot but again if you are talking about many years of 15-20 percent growth, which is not inconceivable of given the kind of growth we have in the last year, four years in terms of auto demand. So I think if we get some of these data, there is still room for both in terms of multiples moving up and in terms of growth driving further valuation upside.

Latha: Would you want to point out to us any specific sector that you would be buying for instance, would you buy non-bank companies because wholesale rates could go down the way inflation is trending lower or within the auto space which ones would you like?

A: Yes, you mentioned non-banks, so among NBFCs, we like companies focused on commercial vehicles, which is a great place to be because that cycle is going to be even more powerful than auto cycle. We like NBFCs focused on housing. Some of the banks may still have meaningful upside, we have stayed away from the public sector undertaking (PSU) banks but maybe it might be even time to look at PSU banks if the inflation cycle has turned. I would say that some of the other sectors, one of the sectors that we have been a little disappointed that it has not done better but again the data should follow. I think some of the other capital goods sectors and even some of the domestic consumption stories, which have been somewhat disappointing till recently I think again with the inflation and oil backdrop, there should be recovery in those. So I would opportunistically look at some of those names.

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First Published on Nov 3, 2014 08:39 am
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