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Last Updated : Mar 07, 2018 06:39 PM IST | Source: CNBC-TV18

More optimistic about India from fundamental perspective: Arvind Sanger

The big story this morning remains the global landscape. White House Chief Economic Advisor Gary Cohn has resigned from President Trump's Administration over the issue of import tariffs. As well in news overnight, North Korea had said it was open to talks with the US on denuclearisation. In an interview with CNBC-TV18, Arvind Sanger, Managing Partner at Geosphere Capital Management shared his views and outlook on the same.

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The big story this morning remains the global landscape. White House Chief Economic Advisor Gary Cohn has resigned from President Trump's Administration over the issue of import tariffs. As well in news overnight, North Korea had said it was open to talks with the US on denuclearisation. In an interview with CNBC-TV18, Arvind Sanger, Managing Partner at Geosphere Capital Management shared his views and outlook on the same.

India has its own challenges. The global situation has gotten a lot less favourable and that too is causing a little bit of a pause in the liquidity flow that has been coming in domestic market, he said.

Indian earnings recovery and the economic recovery seems to be finally starting to move in the right direction with all of the challenges in the last 12-15 months now in the rear view mirror but global liquidity is the problem and India backing situation keeps dragging out and now we are fundamentally more optimistic about India including the bad loan situation, he added.

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Road and infrastructure sector is where we would continue to see more action, said Sanger.

We own some of the non-banking financial companies (NBFCs) that have continued to do well. We owned one of the private sector banks that is in trouble. My sense is that this whole Punjab National Bank (PNB) situation will not drag the banking sector down. I am not rushing in and buying public sector undertaking (PSU) banks, he further mentioned.

Below is the verbatim transcript of the interview.

Latha: There may be good and bad news globally but India continues to fall, do you think that there is more reason for the markets to fall or they fall enough?

A: I think India has its own challenges and obviously you were talking a few minutes ago about the bank situation and that seems to have become the anchor that is driving the market lower but the global situation has gotten a lot less favourable and that too is causing a little bit of a pause in the liquidity flow that has been coming to the domestic market.

So global investors are nervous about global cues. If global trade war is going to break out and investment in global markets becomes less desirable or more dangerous and therefore, investors are pulling back a little bit from that and then India itself is seeing some challenges.

Although, it is ironic that the Indian earnings recovery and the economic recovery seems to be finally starting to move in the right direction with all of the challenges in the last 12-15 months now in the rear view mirror but global liquidity is the problem and India banking situation keeps dragging out and I think we are fundamentally more optimistic about India including the bad loan situation, but the political situation in India also notwithstanding the north-east results is going to be challenging this year because of the concerns about what the tea-leaves are reading for the 2019 Lok Sabha election. So I think those are some of the reasons why the markets are probably even in India are not likely to see any kind of a V-shaped recovery and likely to remain somewhat rangebound.

Anuj: From the index point of view, the problem is that some of the urban consumption stocks and some of the financials have the highest weight in the index and they have led the market rally. So this year do you think the portfolio focus should be completely different, more towards rural stocks, more towards agricultural stocks?

A: I think rural and agricultural is an easy macro call to make but I think there are other areas. Clearly, the road and infrastructure sector is an area where we could continue to see more action – the Bharatmala scheme and you have a lot of stuff going on in terms of urban infrastructure, metros and what have you as well as potentially a lot going on in the affordable housing. So there are areas.

So I think even some of the NBFCs are focusing on the affordable housing as well as other infrastructure could benefit. I think the cyclical recovery as it broadens out, there are many opportunities that are going to come to the front from a fundamental standpoint.

I think the macro risks both on the India political front and on the global macro front are going to be a headwind but on the other hand, I think the earnings fundamentals are likely to be more broad based in the recovery sense and even the IT sector, which has been under a cloud, looks like might start to see some signs of stabilisation and recovery. That could be another area that could continue to rebound from here.

Sonia: You mentioned that you don’t expect a V-shaped recovery for the Indian markets anytime soon but do you believe that this is still a bull market correction or have we entered into a bear market phase now?

A: I think it is a bull market correction but the problem with bull market correction is they can be very short in duration or they can be somewhat dragged out - the previous highs might take a couple of quarters. My view would be it is more the latter than the former. But in the end, we are looking for individual stocks that we should buy and we are looking for big sell-offs coming out in some of the stocks that we have our eye on and they can be in a variety of sectors. Some of the market leaders are going to have challenges and that could provide a bit of a headwind for the index to go back very quickly.

Latha: At the moment what is your sense? Having fallen 1,000 points from the all-time highs, is it attractive? Are you a buyer right now?

A: I am a buyer of individual stocks and I am finding one-two stocks that have gone to our levels. There are others that are still a little further away. So the market in our opinion has not done chopping around in terms of a trading range and our goal is not to be – we are not worried that the market is going to run away from us. We are being somewhat patient in putting money into it but we are starting to put money into it.

Anuj: Are you a buyer in PNB or any other public sector undertaking (PSU) bank?

A: We did buy one PSU bank but it was luckily a small size. On the other hand, we own some of the NBFCs that continue to do well although we have pulled back a little bit. We have owned one of the private sector bank that is in trouble but I think Axis Bank, ICICI Bank concerns with the two CEOs getting called in terms of the PNB enquiry is a bit of an overreaction. My sense is that this whole PNB situation will not drag the banking sector down and the way that the whole non-performing assets (NPA) situation has, this is a one of clearly a failure for PSU bank but I am not rushing in and buying PSU banks but I am looking at some of the private sector banks that have lagged and looking at opportunities.

Latha: I wanted to also get your view on this Gary Cohn issue. Can the entire protectionism lead into any unravelling in global markets at all? Both Europe despite what happened in Italy and the US market, Wall Street, have not reacted all that negatively. It was a one day reaction.

A: I am really nervous about global markets because I think what President Trump is doing is playing with fire and he thinks that by threatening other countries, others will back down. However, there is a political dynamic to this; threatening countries and asking them to back down is that the other countries get their backs up. What that can end up resulting in is a global unravelling of what has been a multi decade growth in global trade. If you do get a tit-for-tat tariffs and that escalates and Europeans put tariff on some US products and then US retaliates by putting tariffs on European car imports as President Trump has threatened, I think the risks here are really high.

Gary Cohn was one of the most prominent voices speaking in favour of global engagement, global trade, and not doing anything to hurt that, and his departure in my opinion raises the risks of miscalculation on both sides and most probably on the US governments side, leads to a trade war and I think that would be hugely negative for global markets because we have had a three or four decade growth in global trade and fall in interest rates if you look at a long cycle. So, both might be turning on a long term basis from historic lows in interest rates and historic kind of high levels of global trade could be turning negative and if that turns out to be the case, then the market is going to face greater headwinds than frankly what is so far a modest correction.

Anuj: As they say, there are no winners in trade wars; in that case, if this escalates, could this be case where everything is down, commodities are down, exporters are down, even commodity consuming companies are down, could it be that kind of year if this escalates?

A: Yes, all sectors could bear a hurt but the biggest high flyers have been technology stocks. Now technology stocks in many cases are also global companies and I would not expect in any global stocks to be left unscathed in a global trade war. I think unfortunately one of the realities and yes so I think commodity sector would not be immune to that. However, commodity sector is not what have led this market higher and so far we have not seen China retaliate yet.

China has been playing somewhat the adult in the room as compared to the US in trade and unfortunately President Trump seems to have this long held belief, going back 30 years if you look at this own interviews, that somehow trade deficit means somebody else is taking advantage of you. Therefore, the risk is with that deep held belief that he is going to continue to escalate this. Therefore if China joins in terms of retaliation, and Europe joins in term of retaliation, the risks are that certainly commodity sector, but other sector could get dragged down.

Latha: We always imagine this kind of an unravelling, even when Brexit happened, that all of Europe will unravel. Politicians are not so stupid, will they wait for that, will they not take damage control steps, is there a case to buy this dip?

A: Remember Brexit was a bunch of voters who were upset about things and made the decision, but the leadership of that time and subsequent leadership of the UK government and all the other governments who have been trying to minimize the effect of dislocation on trade, the problem you have in the US is that the leader of the US believes that free trade is bad. That is the first major leader. Brexit was a bottom up kind of a protest but the leaders were more sane and adult if I may call it that. Here you have a US President who is behaving like the chief bomb thrower and that I think is highly destabilising and that is the problem. It is not just the voters saying it, but it is the President saying it and that is what makes it so dangerous.

Sonia: I just had one question on how to approach the Indian markets now in terms of largecaps and midcaps because the correction in the midcap space has been really brutal so far. Do you think for the rest of the year or at least for major chunk of this year, it is better to stick to largecap or would you still delve into some of the non-index largecaps for the midcap variety?

A: I think at the end of the day good companies are good companies but I think you make an excellent point. Some of the midcap valuations have gotten so extreme that I think one of the risks remains that in the selloff, the midcap correction could be much larger and although there might be a long term story in many of the midcaps, if you are going to play the rural plays, you are going to play some of the other plays that you are talking about. There are not too many largecaps that give you exposure there, but I think if the risk is that the broader market is going to remain challenge and could go down, then some of the safer bets could be some of the largecaps which will get sold off less because either the valuations are less stretched or there is less hot money to come out in those names.

So, I think in that sense, largecaps would be better defensive stocks to own until we get a better sense that the market liquidity and I think one of the thing we have to watch is how to see Indian liquidity which has been one way street, how does that deal with this volatility and we have already seen some flow slowdown dramatically. So it will be interesting to watch that but that is one of the risk factors we are keeping an eye on.
First Published on Mar 7, 2018 09:59 am

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