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Last Updated : Sep 12, 2016 05:45 PM IST | Source: CNBC-TV18

IT growth story to be more choppy, less robust: Geosphere Cap

IT sector will continue to face headwinds from the US Presidential candidates Donald Trump and Hillary Clinton. The sector is unlikely to throw up big surprises, said Arvind Sanger, Managing Partner, Geosphere Capital Management.

Global markets are dealing with the fear of inaction from the European Central Bank and a hawkish tone from the US Federal Reserve. Last week, ECB chief Mario Draghi decided to leave rates on hold, but investors are bracing for an interest rate increase by the Fed in December.

The real risk to the markets is that valuations in the US and emerging markets are not justifiable, Arvind Sanger, Managing Partner, Geosphere Capital Management, told CNBC-TV18.

Sanger feels the IT sector will continue to face headwinds from the US Presidential candidates Donald Trump and Hillary Clinton. The sector is unlikely to throw up big surprises and the growth story going ahead will likely be more choppy and less robust, he said.

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

Latha: What are you making of the way the markets tanked on Friday and whether this looks like yet again it is only a dip that will be bought?

A: We are now dealing with the central bankers' fear that A: That Draghi did not do much when some people were hoping that there would be QE coming from European Central Bank (ECB). B: More poorly the Fed has started to talk very hawkish and Fed clearly wants to go most probably once this year. I still think September is a long shot but December is looking much more likely on the cards.

So, there is possibility even if they don't go in September in the coming week getting a very hawkish statement from the Fed. So, the markets are maybe getting adjusted with the fact that at least one pillar of the easy money might be slowly being withdrawn and as one of your speaker was saying earlier this is a market in which liquidity and negative interest rates and low interest rates have trumped any historical value metrics.

So, the real risk for markets right now is that most markets and that applies to US, emerging markets (EM) and certainly also applies to India are trading at valuation levels which are not justifiable given earnings growth and an only be justified because of extremely low interest rates and liquidity.

Anuj: The other interesting bit is in the past we have seen sometimes when the market gets nervous about Fed rate hike there have been times, it has been markets way of pressurising the Fed ahead of the meeting and then Fed develops cold feet again and doesn't disappoint the market. Could it be that scenario playing out, a bit of a Liar's Poker game here?

A: Absolutely it could be. The market clearly likes easy money and every time the Fed threatens to take easy money away the market throws attention but I get the impression that the Fed recognises this game a little bit and feels like it needs to give itself a little bit more room. So, I am not as convinced that unless the market has really sharp selloff form here the Fed is going to give soothing sounds come this Wednesday. So, the risk here really is how much of a pain the market is going to have to show before the Fed will pay attention. Certainly Friday's move was by itself not sufficient to cause the Fed to back off.

Sonia: The two spaces that have lost favour with investors this year is IT and telecom. Do you think the days of big wealth creation in sectors like technology are now behind us?

A: I don't know if we can say that the sector is over but the big moves, the big surprises probably are behind us as the industry is large enough and mature enough and frankly there are all kinds of issues that are coming up in this election cycle from both candidates in US in terms of being unsympathetic or unfavourable to things like H1B. So, there are challenges and headwinds that they are going to face but that doesn't mean that the growth story is over but it is just going to be a little less robust and a little bit more choppy as we go along. So, therefore there is going to be opportunities to buy them into pull backs but right now we are seeing disappointing guidance from several IT service companies. So, that is an area which is facing the challenge and then you mentioned telecom.

Telecom obviously is going through the dislocation of Reliance with its Jio offering and again I am not sure that there is any reason to rush in and buy. So, these are the telecom stocks which frankly have been non-performers or under performers for a while now and I am not sure that anything has changed here where it makes the compelling buy. So, unfortunately, particularly the telecom sector could be value traps for a while and I think IT also maybe a little early to step up although there is going to be medium and long term value in our opinion because growth dynamics that drive that industry on a long term basis are not impaired, they just maybe a little slower.

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First Published on Sep 12, 2016 10:12 am
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