Next leg of rally to come from domestic sectors: Geosphere

At a time when most analysts are betting on a March tapering, Arvind Sanger of Geosphere Capital Management said he perceives Fed to begin the process in December. Sanger said a taper in January or March Will Cause short-term volatility.

Unlike other experts, Sanger believes a strong data from US economy will be beneficial to domestic and emerging markets. He sees Nifty scaling above the record highs of 6350 and believes a new government will be a big positive for equities, which seem to favour a BJP led rule. He forsees next leg of market rally to come from domestic sectors. Below is the verbatim transcript of his interview on CNBC-TV18 Q: The US markets are sitting at record highs and we have seen some dovish comments come in from Janet Yellen as well that is inspiring most markets globally at least for the day. How are you approaching emerging markets (EMs) like India now?
A: It is a little tricky in terms of the cross currents right now on a day to day basis because clearly the US economic data from last Friday on the employment data suggested that tapering might be back on the table for December. Obviously, Janet Yellen comments, at least preparing for testimony coming up today in New York is somewhat more dovish. So, those cross currents will remain with us but the reality is that we have to invest in India or other markets recognising that taper is a matter of ‘when’ not ‘if’ now and whether that is December, January or March which seems to be the range in which expectations are bound, somewhere in that period it will start.
We have to assume that that backdrop exists and that is going to cause short-term volatility and look through that and try to make investment decisions not based on the day- to-day data flow and news flow coming out of the US but based on what is going on with the economic fundamentals of the companies and or the countries.
In that sense yesterday some of the policy measures, some of the monetary measures announced by the Reserve Bank of India (RBI) were somewhat supportive of the rupee and of liquidity. Therefore, in a backdrop of having had some good luck in timing, our current RBI governor Raghuram Rajan has done a very good job. It is important to seize that luck and ride it well, and do the right things. He has done a good job and he seems to have gotten a lot of credibility early which is very important so that when the tough times come that credibility can be used to provide support. So the rupee volatility is going to exist but it is going to be in a narrower range probably than the kind of wild swings that we saw back in July and August. Q: You spoke about the economic fundamentals of countries and companies - we saw this big pro-developed markets (DM) trade earlier in the year and then the anti EM trade got corrected, we saw some respect for valuations or at least the liquidity flow back. Do you think that flow back of liquidity is now going to stop or at least ebb away because valuations now seem rich enough? Do you think there will be now once again a pro DM trade so what we have to watch out for is not news in terms of tapering but every good economic data in the US becomes bad news for India?
A: To some extent the relative economic data matters; if you US economic data gets very good, very fast then it is a pro-DM and anti-EM trade. For the most part year to date performances, it has very much been a overall with the short-term swings not withstanding, it has been very much a pro DM trade, and EMs have lagged badly.  India has been one of the better performing EMs in that and we can come to that as to what has distinguished India versus other EMs.
However in terms of that DM-EM label, I think that as we have seen the distinction this year let us say between Brazil or China versus India I think may be we are being too simplistic and putting it all in one broad brush. Yes US has done better, Japan has done better, Europe has done better than EMs but within EMs there has been a distinction.
So, when I look at 2014, it is hard to make the case that it is going to switch back to an EM trade if taper is on the table. I think it is going to be a more selective - where is the growth good and if taper is caused by US economy doing better then US will continue to get some of those dollars. If Europe recovery comes back, but on the other hand France is looking a bit of a concern so Europe remains a question mark. Japan has some legs to it and in EM, you have to look at each individual. So I think it might become more of a now that the taper is behind us in terms of that as a short-term driver, what are the fundamentals of the countries. Q: You had a meeting with the finance minister, what has the key takeaway been from that and how are Foreign Institutional Investors (FIIs) really now approaching India?
A: Clearly, the government and the RBI are doing everything they can to make sure that the FIIs remain engaged in India. It is clear that one of the things that they all recognise is that domestic institutional money is largely absent from the market and domestic retail money is also absent from the market. So FIIs, are a very important part of both the foreign currency flows that fund the current account deficit (CAD) and even if it is reducing it still needs some help and therefore provide rupee stability and provide some market confidence. Eventually, the market confidence will return but you can't have a return if the FIIs abandon the market. So if FIIs keep supporting and at some point domestic investors come back in that will help.
The objective from what I could take away from that meeting was of the finance minister both conveying the message of how serious the government is about economic reforms but as importantly, about how keen the government is to address FII concerns about some of the impediments to investing in India.
I was convinced that the government is clearly very much interested in removing impediments, so in that sense yes that was positive.
As far as the economic policy as I said earlier, there have been areas where things have worked more effectively then others although the government obviously would like to tell us that the Cabinet Committee on Investment (CCI) has removed a lot of impediments. But as we heard from corporates some of the impediments that supposedly the CCI has removed still remain awaiting state approval and other approvals. So, it is not as hunky-dory on the economic front. Q: The move from early September has been actually IT and pharma, in fact year to date these are the two horses on which people have betted. Would you still see juice in those bets or would you primarily move away from them and look for some other domestic investment bets?
A: I would say that the domestic investment bets is going to be the next leg of the rally because if the market remains depressed or in a range bound trade with rupee looking like it is vulnerable then the bets remain IT and pharma because those are the non India bets.
However, those are not going to drive the next leg of the market. Although, I am not saying that those are going to fall apart, there is no reason for them but in terms of the next leg of this market it is going to come from some of the domestic sectors. Which sectors will those be remains to be seen.
Telecom and oil and gas are two sectors where there is some ongoing reform that we find encouraging that helps us be positive. What we look for is some of the domestic capex when we can make that bet the domestic industrials, the domestic capex.
The one area that we remain cautious is the domestic consumption where if telecom prices are going up, if diesel prices are going up all of these are not supportive of the consumer leading the way out of this slow economy. The consumer will be part of the recovery but it won't be leading and those stocks already trade at pretty full valuations so that is not necessarily the one that is going to drive the recovery.