Sanger sees the Nifty slipping below 8000, and says he will use the opportunity to selectively buy stocks. He says crude prices are unlikely to fall below USD 40 a barrel
Arvind Sanger of Geosphere Capital feels the Nifty easily has room to slide another 5-7 percent because of adverse Nifty cues. He sees elections in Greece, a likely exit of that country from the European Union and concerns over a possible rate hike in the US as the major factors weighing down global markets in the short term.
In an interview to CNBC-TV18, Sanger says a failure on the part of the European Central Bank to deliver on Quantitive Easing (QE) and a possible victory for the opposition part in Greece could undermine sentiment further.
He says the market will be closely watching the minutes of the last Fed meeting, to be released on Thursday.
Sanger sees the Nifty slipping below 8000, and says he will use the opportunity to selectively buy stocks he is bullish on.
He says the government is getting active on the policy front, even if right now it is taking an unconventional route that is not sustainable in the long term. Also, he says that some data points are suggesting that the Indian economy is turning around.
However, he says he will be patient and not buy aggressively till the election in Greece later this month are over. That could be a trend driver either ways, he feels depending on the results.
On crude, Sanger says he would be surprised if prices fall below USD 40 a barrel. He feels the slide in crude prices is on its last legs and that crude could bottom out after another 10-15 percent more decline.
He says strengthening dollar is a bigger headwind for the market as it immediately translates into risk off.
Below is verbatim transcript of the interview:
Q: What was the big reason for the correction that we saw in the Indian market yesterday and how would you approach it now?
A: The Indian market was probably held up better than many other markets. So there was a bit of a one-day catch up sell-off which was a little more severe but not much severe than what happened in other Asian markets. So it was 1-1.5 percent more than other Asian markets.
However, I think this is driven by some amount of global risk off and that global risk off being caused by a couple of factors. One concern is the Greek election coming up and some concerns about Greek exit from the euro again becoming a point that is being discussed and that could create some risks.
The other is the US Fed interest rate cycle which may raise rates and tomorrow you will get the minutes of the last Fed meeting when they changed the language to patience from extended period.
There is some concern as to how quickly the Fed will start withdrawing liquidity and those are two of the global risk factors in addition to the sharp meltdown in oil prices. While lower oil prices may seem positive for oil importing countries like India but it is disorderly and that is a concern.
There are also concerns about global economic outlook which is creating some risk-off in global markets. This has been another factor that has been the combination of these factors were behind the profit taking that we saw in India as well.
Q: On account of these three factors, Greece as well as the disorderly fall in crude, what is happening in Fed and when will they hike rates? Do you expect this global risk-off to continue, how much lower could the Indian market goes?
A: It somewhat depends on how badly global markets respond and how the news out of Europe plays out because in Europe you have the Greece news, you also have the expectation that the ECB will do some follow-up quantitative easing in the near future.
Let us take the bear case, if you get some disappointment, the ECB does not deliver on QE in the short-term and push it back to their March meeting and at the same time we get fears of the Greek election going to result in this opposition party which is quite opposed to some of the clamp down on spending and some of the austerity measures. Then there is a concern of Greek exit and some hawkish details coming out of the Fed's last meeting minutes.
If you get a combination of these factors, you could get another 5-7 percent pullback in Nifty quite easily and therefore, you could dip below 8,000. One of the risk factors that we have to keep an eye on is global cues that could cause risk-off. So that would be my near-term expectation and then if that develops further into where Greece does exit the euro and there is a more disorder, you can paint a much more scary risk-off scenario but that is certainly not where we are focused on right now but we are cautious short-term because there are some uncertainties around.
Q: In hindsight a global dip is generally the best buying opportunity for Indian investors. Would that be the case this time around as well?
A: I would expect so. I would want to be a little patient and not rush in too quickly because the Greek elections are not till January 25. The commentary between now and then might remain somewhat uncertain. Therefore, tomorrow’s Fed minutes are not expecting any huge shocker.
Clearly, the indication is that Fed is embarking on sometime in 2015 on an interest rate raising cycle but I don’t think there will be any big shockers there. But the Greek situation does create uncertainty.
I would be patient and if Nifty pulls below 8,000, I would be gradually stepping in and picking on stocks that are there on the long-term basis. This is because it looks like this government has finally started to move on several funds even if it is having to use a route which is not necessarily long-term sustainable without getting Parliamentary approval but the government seems to be focused and hopefully will get more action out of this government over the next few weeks and months.
The economy itself is showing some data points that are suggesting that things are gradually turning and all of the optimism is starting to translate into reality. So all of those factors suggest that any meaningful pullback in India would be in our opinion a buying opportunity but at the same time, we will be somewhat patient in that.
Q: It seems hard for the global markets to bottom while crude continues to tumble as well as the dollar continues to rise. What is the in-house view at Geosphere about where crude might bottom as well as on the dollar index?
A: On crude we have been even though we were somewhat bearish in Q4 last year. We have been surprised by the speed and the magnitude of the fall. At this point it is almost impossible to say how much more it will fall, although we are getting relatively close to the point with another - we are already at USD 51/bbl on Brent.
If we get another USD 51/bbl or so on Brent, it would put West Texas Intermediate (WTI) in the low 40s, we would be at points where at least some of the producers might start to get to cash breakeven.
We have over shocked in terms of long-term fundamental value of crude, in terms of marginal cost of a production and we are even getting in the next 10 percent move in crude prices towards where we would start to run into cash cost.
We are not that far from the bottom, I would be shocked if Brent went into the 30s and so, it could get into 40s, we already have USD 51/bbl, it can go down by another USD 5-6/bbl easily but we are in the last legs of sell-off. One concern is that demand seasonally slows down starting in March and therefore, does crude bottom before that or does crude bottom at that period. We are in the last 10-15 percent in terms of the magnitude of the crude pullback.
The biggest part of the pullback is behind us but that doesn’t mean that we couldn’t have some more down days and therefore, that will remain one of the risk factors. But at this point, crude is not going to be the major headwind, dollar is clearly a headwind and a bigger headwind because that is reflective of risk-off and that is reflective of people taking money out of other parts of the world particularly Europe is notable and that hurts emerging markets too. So that is another risk-off factor.
I think this volatility is going to be around with us over the next few months as we move towards US rate increase. So I think that volatility Indian investors are going to have to deal with but hopefully the Indian government in the meantime and the Indian economy in the meantime are doing enough.
Q: A commentator stated that the US markets are in a very mature stage of the bull market and there could be a limited upside from hereon for the US equities. What is the sense you are getting about what stage of the bull market India is in right now?
A: India has barely started its economic recovery in terms of earnings from the trough of the GDP growth and the earnings growth that we saw a couple of quarters ago, so India is still in its early stages, obviously stocks has had a great run in 2014 so there is always room for pullbacks here but I think in terms of India’s medium-term to long-term story, we are still in the very early stages.