In an interview to CNBC-TV18, Madhav Dhar, Managing Partner at GTI Capital Group discussed fundamentals of the market.
In an interview to CNBC-TV18, Madhav Dhar, Managing Partner at GTI Capital Group discussed fundamentals of the market.
Below is the verbatim transcript of the interview:
Q: We seem to be in the midst of a correction here. How deep and how serious is this likely to be because this is also coming at a time where global markets have been pretty strong?
A: It is hard to say. It is a testimony to how strong this bull market has been that a 3 percent odd pullback is seen as a correction and especially in the US we have had a smaller pullback in the last 200 days than anytime in post war history. So this is a really unusual special bull market with the absolute lowest volatility we have ever seen. So hard to say -- I think there is some confusion specially when I talk to people in India about reform and Modi and the bull market, this is entirely a global bull market. It has almost nothing to do with India.
If anything, India has underperformed in terms of its contribution either to global liquidity or to global growth or to global reform. So this bull market is triggered basically by the US by Trump saying he is going to cut taxes in half, deregulate the US economy and boost infrastructure and boom, the entire world has taken off; India has taken off with it. So the pullback in India - I think it is very short perhaps it will go away.
I think it will probably flow with the US and you are right, the last week have been perhaps a smaller aberration and I do not put much heat to either very short-term stuff or the fact that anything material has shifted, the correlation between India and the rest of the world still remains very high based on global liquidity.
Q: By that logic, if you are saying that this has got very little to do with India and this is a global bull market, any meaningful correction has got to be something global then?
A: Absolutely. I think so. Everyone is obsessed with Gujarat elections and some of the reforms that have taken place. I think those are -- like everything else I think of global factors and local factors. I am not suggesting there are no local factors. I am just saying they have been neither strong enough to differentiate India and frankly not weak enough except for demonetisation to derail India. It's been somewhere in the middle and the way I look at things there have been four events in India in the last 18 months which is - first, demonetisation which was a bad idea and badly implemented.
Second, goods and services tax (GST) a good idea but poorly implemented and that is now course correcting in a good way. Third has been unambiguous positive which is the bankruptcy code; some issues of how far it will go and whether it will be implemented properly but I think that is the best reform we have seen in a while and the recap of the public sector banks which is a big mixed bag in the sense that it had to happen, it is better late than never. It is sizeable, it is effective, the banks have rallied perhaps it will be prelude to the start of a credit cycle which is terribly important. So I think that is very important but it has to come along with changes in governance structures and state banks and so on. So those have been the four events and some have been negative some have been positive, largely it has been average.
So I do not think India has differentiated itself. The one interesting thing that is going on that I am watching carefully is the full-blown privatisation of Air India and that will be a big deal psychologically and that is also being underestimated. If that happens in a full scale way then that will be the first time I think there has been serious privatisation in India and that could be the start of a bigger psychological move in India where people will look at India with different eyes. It remains to be seen.
Q: Narrowing down on local factors then, if in case the margin of win for the BJP in the Gujarat Assembly Elections is not as great as anticipated. Do you think that the market would overwrite that and look past it and it would then be global cues that would determine further correction? How does it work?
A: I completely couldn't care less about Gujarat elections. I think this is an Indian obsession of assuming that politics are very important. I am sure for a day or two there will be turmoil in the market, people will not even guess which the right way to trade it is but Modi's entire election has been irrelevant to the stock market.
What market around the world including India focus on is whether change in politics leads to change in economics? So I do not know whether change in Gujarat is going to lead to change in economics. I mean Modi has had the biggest mandate. We have seen in modern times and he could have done anything with it and so an increased mandate in Gujarat is not going to change what he could have already done. So I feel absolutely no heat to it, none whatsoever.
Q: The other thing is that despite what we have seen globally, the FII flows into equities haven't corroborated the rally that we have seen. It is primarily because of domestic institutional investors (DIIs). Do you think that that trend is eventually going to change? Is it linked maybe to incremental reforms that you spoke about such as the privatisation of Air India? Is that what FIIs are looking for and want to see?
A: I think so that is a good question and I think both things had to happen. Prashant and I have talked about this over the years that one of my big bets was that gold and real estate as alternative uses of store a value will end in India and there will be a movement in financial assets and that is what we have seen in the last two or three years. So that I do not think is a cyclical trend . I think that is a structural shift of Indian savings coming out of real estate, under the mattress, in gold into financial assets and that is what we have seen and that has swamped foreign institutional investors (FII) flows and as I said this is a global bull market and India hasn't differentiated itself in anyway except the currency has been reasonably strong.
So I think when people and I think from foreign investor's standpoint, reform in India has been underwhelming if not outright disappointing in the last couple of years and demonetisation was a well-intentioned experiment gone horribly wrong and the rest of the reforms, if you can call it that, have been middling. I think full scale privatisation, if it takes place, full scale infrastructure building out which will lead to much greater employment is what people want to see and if that happens, I think people will see India standing out and more money coming in.
Prashant: If from an FII perspective, as I said to quote you, reforms in India have actually been underwhelming on balance. The market here could have underwhelmed as well, maybe relatively speaking it has done a little bit lesser as compared to global markets like the US but on its own it has done pretty well on any scale.
A: It has done very average.
Prashant: Why do you say that?
A: Brazil is up 80 percent. I think some of the other riskier markets are up 50-80 percent, UK is up 10 percent, the US is up 25-30 percent, and India is up 25-30 percent. So it has been very average. If you adjust for India risk, it has done sort of what it should, somewhere in the middle. So, it is a rising tide driven by the US and global liquidity that has lifted all boats and India’s boat has not found its own motorboat. So it is heaving and troughing with global tides.
I think it will probably differentiate itself because I think our profit cycle is slightly different, the credit cycle is slightly different. I do think there will be some incremental reform, Goods and Services Tax (GST) when it gets ironed out, will be a huge positive benefit. The digitalisation of India – so I think a year from now it will look very different, but those are structural reforms that are underway. I am simply pointing out that cyclically what we have talked about is a global bull market that India has been caught up in. We have not done anything locally to truly differentiate ourselves; that is simply the point I am making which does not take away from my structural bullishness of India in terms of the low hanging fruit that will keep delivering.
India has a long way to go, but, I think the last two political-economic/economic years have been underwhelming relative to the opportunity, relative to the mandate, but it has not been bad. So I am not saying it has been negative, I just think it has been sort of average.
Prashant: Although I meant to be sure I think countries like Brazil go down 50 percent one year, they come up 80 percent the next. We have seen that over the last 10 years.
A: I agree.
Prashant: To be sure, you are bullish, you remain bullish, you are structurally bullish on India, just to get these things clear, you think the global bull market is well and truly on, will continue, or do you have any doubts there, the mother market, the US increasing.
A: I think you are now touching a nerve and I have been very bullish as you know and I think I am starting to get worried for the first in many years. I think we are at a late stage bull market now and this last year just in terms of price extension, valuation, global enthusiasm, local enthusiasm, and full-blown participation, I think we are slowly getting -- I feel like a middle-aged man at 2:30AM at a kid’s party. It is a lot of fun, I think it will probably carry on longer and it is too early to leave the party, but you know it is a late party and you know you will wake up with a headache tomorrow but you don’t really want to go. So, I feel a little bit like that. I didn’t feel that a year ago.
Some of the sociological signs are getting there, bitcoin going up 11-12 times in a year, a Da Vinci painting sells for USD 450 million in a fang – if you don't know what fang is, you are not with it. So anytime an acronym gets formed, you know that it is a late stage bull market. India – pick a number –is between 22 and 26 times earnings, US is in its second highest valuation ever, interest rates are rising in the US, UK, even in Japan and the US also although from extremely low levels. However, the global tide of liquidity is receding, very slowly, but it is receding.
The offsetting things are I think the Indian economy will accelerate, US ISM, and production orders are very strong, growth is picking up, and you have major tax reforms underway in the US. So, it is not clear to me, but I do and it is an old bull, started March 2009, coming on to nine years, S&P is up almost 4x of the bottom, so, this is not a young and vibrant bull market. It is an old strong bull and the old saying is that bull markets don’t die of old age, they are killed, and they are usually killed by the Fed. So I am not ready to say this bull market is dead and I don’t think the Fed will kill it, but I think the combination of high valuation, receding liquidity, excessive enthusiasm, are there -- the offsetting thing is rising profit. So, it is a complex game, I am willing to hang around a little longer.
Ekta: In that context and I am going to use your analogy, do you think that India is going to have its own party in 2018 simply because it has underperformed in terms of flows as well as entire equity performance vis-à-vis the globe this year, and if we do get our reform piece correct this time?
A: I think so, I think it is hard to say. I don’t think India has underperformed, I think it has underperformed its reform potential. From a purely quantitative standpoint, the performance has been average in a global context. I think India will outperform over the next two to three years. It will probably outperform in the down cycle and outperform in the next up cycle because next up cycle I think will be with a profit exploding and a new credit cycle and maybe I am too optimistic, and an infrastructure spending binge, and a lot of other countries cannot afford that. They don’t have the wherewithal for that, they don’t have the latent demand for that. So, India remains the highest growth major economy in the world.In the end, stock markets follow economics and economics for -- profits are directly linked to GDP. So, I think that cycle continues for India and if I am remotely right, the GST looks a lot smoother, a lot better, corruption is a lot better, digitalisation is a lot further, and more importantly, you get privatisation and infrastructure going, that is a heady combination, that is a multi-year combination. However, between here and there, I think you will have a big bump in the night just because you are nine years into a roaring bull market and valuations have gone from high to very high and it is a late stage party. So, does not mean there will not be another party, but this party will end.