Positive India, China top-pick; $ may weaken: Mark Mathews

Mark Matthews of Bank Julius Baer & Co is upbeat on India but China remains his top pick within the emerging market space.Although India seems to be going through a soft patch, he remains positive and has not decreased his allocation to the country but does not expect the market to go anywhere. He is long-term bullish on the banking sector in India.He also likes India's social media savvy Prime Minister Narendra Modi and gives him high marks for his one-year performance. The fact that the PM visits other countries to boost India's image is good but the lack of support for the government in Upper House of the Parliament in passage of Bills is a hindrance, says Mathews.Globally, we in a 'Sell in May and go away’ phase, says Mathew in an interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy.He expects crude prices to go up with the reduction in supply of oil in the US. Saudi Arabia for the first time increased its selling price to European countries, he adds. According to him dollar too will remain weak for the next 3-4 months, supporting oil prices.It is also unlikely that Fed will hike rates as soon as expected because the US data is still weak. So it would be good to borrow cheap and invest in quality yields, both dividend equity and bonds which have high yields. With respect to that he would look at fixed income and stocks with high dividend yields in India.

Below is the transcript of Mark Matthews' interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: Are we going to see 7,500 or 7,000 sometime in a quarter or so?A: My gut feeling is that we are in a ‘Sell in May and go away’ kind of year and I have to admit its 80 percent cut but I also have 20 percent fundamental feeling for that and I will start with the world; I think the weakness in the dollar is the major thing that has changed in the world since I last spoke to the channel and I haven’t figured out what the repercussions are but it is a response to the much stronger than expected European data and a much weaker than expected US data. What that means on balance is we might have last quantitative easing coming out of Europe and that’s been a major force driving up risk assets globally. India – another corollary of weak dollar would be strong oil and that would be a headwind for India and the result season has been a terrible disappointment. On balance therefore, I do not think the market should go anywhere for the next few months.Sonia: This month the Modi government completes its one year in office. What has been your assessment of the government as a foreign investor interested in India and do you think that we could be headed for some more disappointments?A: I give them very high marks. The one thing that I really like is that the Prime Minister frequently visits other countries. He has been doing a great job in boosting India’s image around the world and he is also the most sophisticated world leader when it comes to social media.The problem is the lack of total control of Parliament has been encumbrance and we saw that last week with their failure to table the Land Acquisition Bill and my concern is that although agriculture is not a big part of the economy any more, it is around 15 percent of the economy but most people live in the country side and what we can see that in Mahindra and Mahindra or Maruti Suzuki, their earnings in tractors and motorcycle sales that rural economy is hurting. I therefore, worry that there could be a political backlash.Latha: What we saw were a lot of consensus trades ending and unraveling in the past two-three weeks. It was always short crude and long India so to speak and we suddenly saw long crude and short India. We saw short euro and long dollar even that got reversed and it was suddenly a long euro in the last two or three weeks. Now crude is again seeming to hit a ceiling. Is that long crude trade over? Will we see it unravel a lot, in which case India can perhaps expect to see slightly more relief in terms of flows?A: I do not like oil. I am not recommending people to buy it but there are two things that are going to help oil over the next few months. The first, we are seeing very tangible evidence of a decline in supply from the United States. For the first time in many years the supply of oil is finally starting to go down and that is where the Saudi wanted to achieve and Organisation of the Petroleum Exporting Countries (OPEC) wanted to achieve. A few days ago Saudi Arabia for the first time in long time increased its selling price to Europe. I think that is a sign that the war is over as far as oil goes and the other thing is that if I am right and the dollar is going to remain weak over the next three-four months – that also will be supportive for the oil price. So I think it is possible it can still go up.

Latha: What are the areas in India that attract you stock wise?A: I do not spend enough time on it but the sector that I have always thought is a good long-term bet is the banking sector because the household debt is low and if inflation remains relatively tame, which I think it will and interest rates can come down then it seems to me that you should see more loans there but the Q1 results were disappointing due to a lack of infrastructure spend. My banks idea is a long-term idea.Sonia: You did mention that this is a ‘sell in May and go away’ phase that the market is currently in - in that sense what are you advising your private and institutional equity clients to do at this point. Are you advising them to raise their allocations to Indian equities or do you think that there are other better avenues of investments? A: When I mentioned that, I also said that the US data has been weak and so what that means is the Federal Reserve will probably not raise interest rates as soon as we had thought. That means if interest rates stay low, one good way to invest is to borrow cheaply which we can do and invest in quality yield and I mean that in both quality dividend equities and bonds which have a good yield and are also relatively safe and India has those actually. So what I would do now is I would be in income for the next few months. Sonia: What would you mean by that you would be in income or you would increase your allocation in India?A: No. I mean that I do not think we are going to get a lot of capital appreciation over the next few months but there are securities that provide a good yield.Sonia: Fixed income in the Indian market – that’s what you meant?A: Fixed income and also stocks that have a high dividend yield.Latha: A word on the mix of emerging markets that you would prefer. We had seen in India versus China dialogue develop and Chinese market up until a few weeks ago were doing exceptionally well as well the slight recovery in commodities have made the other BRIC countries suddenly more attractive. We saw money going to Russia and Brazil as well. What is the pecking order within the emerging market space now?A: For me China remains right at the top and this correction was entirely orchestrated by the authorities. The Chinese want a nice steady bull market and they can get there but they need to control the tremendous amount of retail demand for stocks otherwise they will create a bubble in and that will end very poorly. Therefore, I like China.Basic story in China is that the very big rise in real estate prices was starting to cause social instability. People in Beijing and Shanghai with good salaries cannot afford to buy properties, it’s too expensive. The government wants to shift retail favour away from real estate towards stocks and also if people buy stocks that will give them a sense of ownership in the overall economy and that’s what they have started doing but they do not want stocks to go up too fast otherwise it will end in tears but that’s the basic story and it remains unchanged. Latha: Any other market in the pecking order?A: I like India still and it is going through a soft patch but what one can clearly see in investment returns is that the longer you hold something the lower your chance of a loss and I tell people that because if you buy something like India and my opinion at least in my counsel to investors around the world – this isn’t a trade, this isn’t an investment; this is about a very large country that is going to have a lot of growth over the next five-ten years. Do not try to chop around on a month by month basis. So we recognise that India is going through a soft patch but we have not decreased our own allocation to India and we have not told our clients to sell India because it should be a long-term investment.