Subscribe to PRO at just Rs.33 per month. Use code SUPERPRO
Last Updated : Feb 03, 2017 10:45 AM IST | Source: CNBC-TV18

Market likely to touch 9000 over long term; like IT: Ashburton

The Union Budget 2017 looks positive for foreign investors, says Jonathan Schiessl of Ashburton, noting foreign flows into India have been disappointing in last 1-2 years.

The Union Budget 2017 looks positive for foreign investors, believes Jonathan Schiessl of Ashburton. The foreign flows into India have been disappointing in last 1-2 years.

With a fiscally prudent Budget, demonetisation impact fading out and a rate cut expected on February 8 by the central bank, attention could return to India. Up move in market in the near term is not likely due to upcoming elections and other factors, but over the long term, market could cross the 9,000-mark, he said.

The investment house is positive on IT stocks, which are now showing real value. However, Schiessl expects growth headache for the financial sector to continue.

On global markets, he said complacency is creeping in as we get into an environment of increased political risk.

Below is the transcript of Jonathan Schiessl’s interview to CNBC-TV18s Reema Tendulkar and Anuj Singhal.

Reema: Now that the Budget has cleared India of all tax related uncertainty whether it was the indirect tax provision on FPIs or the fear of long term short term capital gains tax, what is the setup looking like for India now?

A: I guess the market is reacting on what the Budget did not contain as much as what it did contain. Certainly from a foreign investor perspective it looks quite positive actually.

Anuj: For Indian market what has been remarkable is that it is the domestic liquidity which has really led to this huge rally. The foreign inflows have not yet started, the out flow has stopped but inflows have not started. Is there a bit of a missed out feeling among your peers?

A: If you look at the FII flows over the last couple of years they have been quite disappointing with money coming into India. A lot of foreign money if it is going to emerging markets at all, they have been chasing those commodity linked emerging markets like Brazil or Russia etc which had de-rated to such an extent. Whereas India couple of years back did outperform.

We would expect following this Budget we will see if there is an interest rate cut on February 8. However we would expect that some attention comes back to India. From our perspective it has probably rallied a little bit too quickly in the very short term. So, you haven’t got that valuation as some other markets might have but with a very fiscally prudent Budget, some of the reforms coming through and with hopefully in the next couple of quarters the demonetisation effect beginning to wear away, definitely foreign money will start looking at India again in a major way.

Reema: Did you participate in this 10 percent upmove that we have seen in the last one month?

A: It did take us a bit by surprise. We were certainly nibbling in some of the midcap names in the midst of the demonetisation selloff. We did manage to pick up some fantastic stocks and looking back at it now, it is like why did not we do more? We have participated lower down.

The only trade we have done in the last couple of weeks has been topping up some of the IT stocks where we are beginning to see some real value. There is some good value in IT spaces but broadly speaking we are still mainly focused on the domestic stuff but we haven’t yet done anything major in the last few weeks in the domestic counters.

Anuj: Are you referring to Godrej Industries as the stock that you wish you would have participated more? I see that as part of your top holdings now. Have you topped up on this investment?

A: We topped up a few months back. It has been a core holding of ours for many years. It is obviously one of the few stocks where you can build a pretty decent valuation on sum of the parts basis. You are almost getting a very well positioned, one of the countries best agricultural businesses for nothing at current multiples.

We have liked it for a long time. We know the management team very well. It has been a core holding of ours. We are quite happy with the position. It is already a big position for us. So, it is nice to see that one.

Reema: Since most of the Indian market upmove is global in nature, do you think the global market rally has some more legs to go from here on?

A: I am not sure the Indian market move is global in nature because as you mainly pointed out earlier, it is merely domestic money that has been pushing it up. Globally, we are a bit concerned, if I am honest, about levels of complacency again. Clearly we are entering in a phase of increased political risk.

All central banks at your back, US interest rates could go higher if we do see this recovery in the US, entrenching and the animal spirits, if you like, coming back. So ultimately, if we get three rate rises, I am not sure equity markets globally are pricing that in. So there is a little bit of complacency creeping in.

Anuj: You did say that you have been topping up on IT off late. Your top two holdings are Infosys and HCL Technologies. HCL Tech has done much better than Infosys and it was there in the numbers as well. But, the risk here is that while we are looking at the valuation, if the earning risk not being well recognised, especially the FY18 or FY19 risk which might make valuations again a bit hazy. Your thoughts on that?

A: Obviously the two issues that IT has faced is the whole Trump issue and protectionism, but secondly demand. Our view would be that actually a strengthening US economy ultimately conflicts some of the issues some of these companies have had with revenue growth.

You see the lack-lustre IT spend in the developed world and obviously if the US continues its recovery and Europe, which the data looks pretty good coming out of Europe for the time being. So if the demand side can recover for a lot of these IT stocks, you could get, I am not sure that the street is pricing in this recovery that we seem to be seeing in the global economy. The street seems to be mainly focused on political issues which to our mind is slightly over-stated.

Reema: So, with domestic flows strong and FII inflows once again starting to come back into the Indian equities, what could be the extent of upside for our markets here?

A: I have been on the programme before saying we had previously thought that the main upside would be back ended of this year as the demonetisation effects wore away and we understood the impact on earnings. Clearly, we are going through a euphoric rise at the moment. I would struggle to find this index breaking through the prior 9,000 levels on the Nifty.

It could go a little bit higher, but in the short-term, I am not sure with the growth outlook still with the uncertainty on certain sectors, still with the political risk globally and obviously we have got the massive elections coming up within India itself, which could introduce an element of risk as well. So, we would not be thinking markets can grind much higher here. But they have obviously been on an absolute rip on the very short-term.

Anuj: I could be wrong, but I do not seer Eicher Motors any longer in your top holdings. Have you pruned some of your exposure? It has given you multiple times returns. Would that be right or are you staying invested here?

A: We have not shifted. That remains a core holding of ours. We were in India in early November, we met the management then and they were saying even then that the impact from demonetisation was not really coming through. That has obviously been proven in the numbers. Clearly, what has hurt though is the commercial vehicle side of the business and that is where we are expecting to see some sort of recovery in the period ahead.

Reema: Any particular reason why you did not top up on the banking stocks? HDFC is one of the core holdings of your fund. In the recent sell-off that we have seen post demonetisation, you spoke about having added to your technology holdings. Why not the financial space?

A: We did actually add to IDFC Bank which has been a fairly, we have had since it was listed on the stock exchange, but we actually took money out of a couple of the private banks that we own shortly after demonetisation in November. Really, on the basis we were concerned about margins and the hit to margins from banks, they had to pull in extra staff to deal with the queues outside their branches.

And as well as the simple fact that the banks had switched off from lending and were more focused on actually getting cash and depositing cash and actually getting cash back out into the economy. And we were also concerned about any news of perhaps, issues with currency coming into branches in a manner which it should not have done.

So, for us, we just de-risked the sector a little bit, if I am honest. When I look at the share prices, that has not been the right call in the short-term. We still obviously own stocks in the sector, but we had shaved them.

And I am not sure the problems are behind us. Obviously, one of the key disappointments were the government plans to recapitalising the PSU banks. And therefore, that will probably mean that we have a growth headache still for a little bit longer. So, the banks, certain ones do look interesting, but the bulk of them we would still be a little bit cautious on.
First Published on Feb 2, 2017 03:38 pm