Trump may weigh on stocks but earnings may surprise: Sanger

New US President Donald Trump's inaugural speech was no different from candidate Trump's rhetoric, centering around the promise of making every decision on trade, taxes, immigration and foreign trade with "America first" being the priority.Trump's statements could mean emerging markets could stay rangebound till the President articulates his policies more clearly, says Arvind Sanger, Managing Partner, Geosphere Capital Management.In an interview with CNBC-TV18, he, however, said that should Trump indulge in protectionism and impose trade barriers, the move should be "disruptive"."Emerging economies that are trade dependent could see some slowdown and India IT firms. They are already facing technological challenges and could see more headwinds," says Sanger.Lewis Alexander of Nomura says that Trump's perceived hard line on immigration may not be such a "straight line" after all, but did not rule out the possibility of a trade war among countries on his watch. "[However] there is currently too much optimism about the US economy, so one will have wait for a month to see how things pan out," he said.

Talking about earnings in India, Sanger says numbers have not been as disappointing as expected but have been mixed with a positive bias. "Q3 earnings haven't seen the full impact of demonetisation."

However, there are two reasons why Indian markets could do well: the economy could bounce back from demonetisation-induced slowdown and the Budget and GST rollout may be positive triggers, Sanger added.Below is the verbatim transcript of Lewis Alexander and Arvind Sanger's interview to Latha Venkatesh, Sonia Shenoy and Anuj Singhal on CNBC-TV18.Latha: What is the sense you are getting? We understand some 200 executive orders are all ready and likely to be signed this week itself. Should we expect a lot of visa, immigration controls and such orders this week itself?Alexander: The first thing we have to say is we don’t know exactly what they are going to be. It is our expectation that a lot of them are going to be by immigration. That was certainly an area where President Obama used his executive authority to change the policy and Donald Trump as the new president does have the ability to reverse that. So I think that is going to be a focus but one of the questions is will there be anything from other areas where he might choose to act. Obviously we will be looking to trade, we are not expecting anything significant there but that is one of the things that we have to see because that is another area where he can act under his own authority, he doesn’t have to wait for Congress.Sonia: Is it time to revaluate your equity investments now because one thing is for sure under the Donald Trump rule nothing will be the same compared to what we have seen for the last couple of years. How does an equity investor chart the course of their investments this year?Alexander: There is a whole lot of optimism about what the election will mean to the economy. Even if you make the most optimistic assumptions about what is going to happen to policy, implementation is not going to be in a straight line and we have already seen for example that. So there is a lot of uncertainty of how things will get there. So it does seem to me that the optimism that we have seen over the last several months is going to have to concern the reality of how policy is going to be made.Sonia: You spoke about the possibility of some policies on trade, the signs of protectionism have raised the concerns globally about a trade war perhaps, is that something that you think could be plausible or is that just a fear?Alexander: I think it is possible. I think President Trump is quite serious about trying to lower the US trade deficit. I don’t think that is necessarily the first thing that he is going to do and if they can achieve their objectives without imposing tariffs that is their preferred option. So I don’t think it is certain by any stretch of imagination but it is certainly possible.Anuj: It is reality now, President Donald Trump, do you think the markets have discounted enough now, the long developed market (DM) short emerging market (EM) trade has to reverse now or do you think this trade has more legs to go?Sanger: It is hard to tell because there are two strains of Trump’s speaking. One is less regulation, less taxes which is positive for US but eventually that is not negative for emerging markets or emerging markets will get interest back. However, the other part is obviously what your previous guest and you were just discussing which is the trade part of it and the protectionist part of it and that part could be quite disruptive and quite negative not just for emerging markets but for US and for global growth. So, I think the real question is which way is he going to go and what is going to dominate in terms of the legislative agenda. I think we will know in the next few coming weeks as to which way Trump is going to emphasise. At first he obviously he has announced that he is having a meeting with the Prime Minister of Canada and the President of Mexico to discuss Nafta and renegotiating that. So, that will be an early indicator of the kind of actual -- after the rhetoric is done how aggressive is Trump going to because that obviously would be negative for North American trade but that would be an early indicator of how he views traders and instrument of aggression in terms of his ‘America’ first approach. So, I think all of that keeps in my opinion emerging markets and markets in general somewhat range bound without anybody wanting to get too far ahead of themselves till they get a better idea. Latha: President Trump turned out to be almost exactly like candidate Trump though we were given to understand that maybe as President he would be somewhat mellow. It was as isolationist and as protectionist as the campaign rhetoric was. Therefore do we have to wait for further action for the long DM, short EM trade to continue or do you think even now with the Presidential speech itself, there could be more short EM trades?Sanger: Let us be clear, if you get past President Trump and you look at what is going on in Brexit and Europe and you look at some of the election rhetoric coming out of number of countries that have elections this year, I think the era of growth in global free trade is unfortunately behind us.So, what we are going to see is much more restricted global trade with a lot of impediments to it. Britain is good talking about a hard Brexit, there will be some negative consequences. US is talking about under Trump actions so if you are an emerging market country which is highly trade dependent, you are clearly facing a world where you will see meaningful slowdown. However, even a country like India which is less trade dependent, which will be less impacted is still going to see some of its sectors like IT services which are already seeing a technology led challenge in terms of their growth are now going to face more restrictive visa policies.I think it is almost a given that there are going to be more restrictive visa policies. What exact form they will take, we will wait and see but I think that in general countries which are trade dependent are going to be more hurt. Countries like India which are less dependent will be less hurt, but they will be hurt. So, I think that is a headwind that we are going to have to get used to. Sonia: You did mention that the IT sector could see some more headwinds but do you see more de-rating in both these sectors, IT and pharmaceutical, because of all the issues that we have seen so far? Sanger: I think the de-rating is quite far along so I am not sure that they are going to sell-off a lot more but there could be dead money. I would feel much more comfortable betting on an India cyclical recovery than I would on global growth for IT companies because it is not just going to be US, it is going to Europe too, there is going to be more protectionism coming out of I think a lot of developed economies. So, therefore that is going to happen and I think it is somewhat surprising to see Trump take as populist tone as he has on the pharmaceutical industry so I think there we have to wait and watch what happens. However, all of those I think are clearly areas which suggest that at least for the time being these stocks, if they don’t de-rate further from here, are not going to re-rate up anytime soon. Anuj: What have you made of the first 10 days of the earnings season in India? Sanger: I have to say that the earnings season is better than what we feared they would. Given demonetisation, we were expecting more earnings challenges. So, far the earnings numbers have been mixed but mixed with a positive bias versus some of the worst fears that existed out there. So, I think the earnings season is okay, it is nothing to write home about, but it is not quite as terrible as it could have been. So, I think in that sense, on a relative to expectations it is a little bit better but I don’t think it is earnings quarter which is going to cause the market to have a big rally in it.I think the reality is that the March quarter hopefully should see some further recovery from the demonetisation hit and then you have a Budget coming up and that is an important metric and then you have elections coming up and hopefully those go well. However, you know how populist is the Budget going to be, how decisive are the state elections results going to be and what are some of the other growth drivers in India are going to determine what happens in the short term to the market and in addition what happens with Trump and with policy towards global trade. So, there are enough drivers for short term volatility that will be interesting to keep an eye on but we continue to like medium and long term domestic growth stories. Therefore, we would use volatility if you get any big sell-off as buying opportunity but at the same time we will be cautious not to get into areas which could be imapcted by global trade. Latha: One, India sold off more than the other EMs since November 8 because of the demonetisation coinciding with the Trump victory. Is there a case for an India outperformance even in an otherwise subdued EM atmosphere and secondly the Ultratech numbers for instance, cement was expected to be worst hit and the Ultratech Cement numbers don’t look horrible. They are mellow, so, therefore as well do you think that there is scope to buy India? Sanger: I would say taking the second part of the question first, I am not as convinced that all the bad news for some of these companies would have showed up in the December quarter because you could have a little bit of a channel stocking before full effect of demonetisation is felt in terms of construction slowdown and therefore cement offtake and other things slowing down. So, I would not say that all the bad news is completely out of the way in the December quarter. The March quarter will still have lingering negative effect. However, having said that, I think you are right, there are two reasons why I think India could be do well. One is that the demonetisation has created an artificially large slowdown and as we recover from that you could see a bit of a bounce back. You have some optimism around GST which could drive some investment flows but there are some earnings risk around GST because there is going to be again some dislocation in terms of businesses adjusting to GST. So, there are many things and there is a Budget which could be very interesting. As I said earlier, India is less dependent on global trade than many other emerging markets, so, for all of those reasons I think if I look at calendar 2017, I think India is quite interesting to us because I think there is enough internal catalyst that could drive earnings recovery; all of that obviously pre-supposes the Budget will be relatively benign and not be too populist or too punitive in terms of taxation for financial investors.