Bernstein's Venugopal Garre: Nifty might correct till 16000 levels and then recover by the end of this year

Venugopal Garre shared his views on the current state of the financial markets

Venugopal Garre, the Singapore-based managing director and senior analyst at investment research and asset management company Sanford C Bernstein, shared his views on the current state of the financial markets and how he sees the global economy perform over the medium term in a conversation with CNBC TV18.

He believes that we might not see any incremental GDP debt escalation from here on, but the path of the economic recovery still remains uncertain, "what we are not certain about is the interest rate trajectory and how the recovery will play out in the second part of the year."

Edited excerpts:

What stood out for you from the India landscape perspective?

I have been meeting quite a few CIOs (chief investment officers) across the world including in India. I was frankly surprised as I was expecting a bearish sentiment on the ground due to what is happening in the global economy with the threats we are facing currently. Even after the challenges we have currently, I could still see underlining bullishness from them. Broadly, there is a consensus emerging that perhaps we are close to the bottom in terms of GDP growth. Maybe we do not see any major incremental GDP debt from here.

Secondly, we have also seen a time value correction in the markets for almost 18 months as we have been moving sideways with no major earnings cut, still we have seen some valuation correction.

Thirdly, the flows from the domestic market have been quite sticky despite interest rates moving up, which was again perhaps a unique take away which is the broader thinking from a top-down point of view. The sector views that emerged are divergent from the top-down underlying bullish view as most of them were negative on IT services, on consumption overall. They were positive on financials, and the big positive areas were autos, industrials. So they have been bullish on smaller sectors and for three of the largest sectors they are either skeptical or not positive. That’s why the top-down view doesn’t really marry the bottom-up view. Hence, what I feel is that we are still focusing on the three-year view for returns rather than the six-month view looking at the things.

You say that we are close to the bottom in terms of GDP growth and there has been a time correction for 18 months. So do you think that the worst is over for Indian equities for now?

That’s a fair way of looking at it. That is what my original thinking was, that one starts to look at the Indian market in a positive way. The idea is to see the convergence of a lot of views. The GDP (growth) of 4.4 (percent) cannot go to 3 (percent). So, we can still go sideways from here. Still, the global economy also has to be taken into consideration. What we are not certain about is the interest rate trajectory and how the recovery will play out in the second part of the year.

Still, if the Nifty falls below 16,000, I will turn bullish and start to buy, but the point is, how much returns are you going to make? Are you going to make 25 percent returns? I don’t think I am in that camp. My anticipation is that we are going to get a positive return in the second half given the uncertain environment we are still in.

Given the kind of macroeconomic scenario we have today, how is it different from the 2008 global financial crisis? Give us a few details.

Yes, I understand that the world is worried about the GFC, basically even I agree we have a lot of similarities. Still, the reality is very different from what is shared in the global press, as at this juncture I do not see this as a consumer problem. In 2008 during the GFC it was basically about the reselling of loans, credit quality and the course at which the loans were given. This time, though, it is a little different, it is to do with the interest rate-led impact on investment banks. So, this time the banks can be supported through liquidity, and this is what the Federal Reserve is doing.

So, this is not a permanent damage to the quality of the assets, it is basically a temporary damage. The other difference is that the policymakers all over the globe are reacting to any issue really fast. That is why there is no systemic risk that can ripple down over the financial ecosystem of the world. Still, the point to be noted is that the global cycle has not converged till now, like it did after the 2001-02 crisis, because if you look carefully three of the top five economies have not seen much growth over the last 12 to 18 months. China, for example, has not performed well over the last 10 to 15 months, whereas India is in an early cycle. Hence, we should probably see some volatility going ahead over the next two to three years as the rates are going to continue to rise and then remain elevated for a little long.

Do you see global companies shifting capacities to India?

Yes, you are probably right. Everyone is positive right now on the India manufacturing story. Still, it is always a question of the relative optimism one has with regards to other markets. There are about 135 global brands, as I call it, which have taken over 200 decisions on manufacturing over the last five years. On similar lines, when looked at for a period of three years, there were 75 companies with 100 decisions. Now what we observed is that at that time there was about 10 percent allocation of the total decisions going towards India. Overall capex of those 75 decisions was about $30 billion, so India was getting probably less than $3 billion as capex investments around those manufacturing decisions. Over the last three years, what we have seen is that we have had around 14 percent allocation towards India.

So, it is a given that India is an incremental beneficiary of these decisions. But some other countries are benefiting meaningfully and in a much more intense manner than India. Vietnam is a classic example with more than 30 percent allocation and the decisions in such countries are not just in assembly like India but even in components and other areas. To summarise, I would say that we are an incremental beneficiary but it will probably take 10 years for us to see the difference in our economy.