Stock Market

Cautiously optimistic on India; eyeing earnings revival: Sanger

Global liquidity tailwinds are unlikely to get any better from now and that makes Arvind Sanger, Managing Partner at Geosphere Capital Management “cautiously optimistic” on the Indian markets.

In an interview to CNBC-TV18, Sanger says the market is not particularly cheap but periodic investment opportunities are available. Market valuations do not suggest a ‘screaming buy’, he says.

India is the best medium to long term growth story amongst emerging markets and valuations reflect the exalted position that the country occupies, he says.

On interest rates in India, Sanger believes the drop in real rates is indicative of a dovish tone. Though inflation, hopefully, will be seen in a downward trajectory, it may not have much more room to fall as prices of energy and other commodities may move up.  

Below is the verbatim transcript of Arvind Sanger’s interview to Latha Venkatesh and Reema Tendulkar on CNBC-TV18.

Latha: What did you make first of the monetary policy, does it signal that there could be a series of rate cuts, is it a distinct dovish turn?

A: 25 basis points in my opinion was a 50-50; I guess other people were higher probably that they would do it but that is not as big a deal. The bigger deal is talking about the long-term kind of rate for what the real rate needs to be and that coming down from 150-200 basis points to 125 basis points is basically a 50 basis point reduction from the mid-point to the current point that they have chosen. So, that is a little more dovish than certainly we anticipated and I think that most investors anticipated.

So, my biggest concern would be — I think hopefully inflation will still continue its downward trajectory although there are some risks that the base effect has been helpful and base effect may not be that helpful but the reality is that with energy and other commodity prices moving up, inflation itself may not have much more room to fall unless some things go right for India. So, I think we will have to wait and see how it develops but it is certainly at the margin is more dovish than what the Rajan Reserve Bank of India (RBI) was.

Reema: We got away with minimum damage for events like the Brexit, the surgical strikes, in fact the midcaps are at record levels. What is the call on the market now, the Indian equities?

A: I think Indian equities are now — clearly global liquidity tailwinds are not going to get any better from here. They may remain the same or I think it is becoming more and more likely the Fed wants to go in December and we will get one rate hike there. So, the liquidity at the margin is going to at best remain stable, maybe get a little worse. So, that is not going to be a headwind or a tailwind, the real tailwind is going to come from domestic earnings recovery and I think that is one where we continue to see frankly few green shoots but the green shoots have not flowered into branches, trees and bushes and the kind of normal earnings growth that you would expect to see.

So, that remains the biggest challenge and opportunity is for more signs of the virtuous cycle and I think one of the more important sectors that we talk about several times is looking at what happens to the banking sector, when does it kind of get passed, the worst point in terms of its bad debt cycle and once that starts to look in the rear view mirror, I think a lot of things will fall into place.

Latha: You wary of buying now India?

A: I think we have been cautious and we remain cautiously optimistic but we are buying individual stocks when we find opportunities and pullbacks. We are not necessarily saying that at this index level the market is particularly cheap but growth or growth turnaround stories that still have attractive valuations are fewer and far between but we do find periodic opportunities.

However, I would say as a whole the market valuations are not necessarily one’s that either from an historical perspective or otherwise cry for screaming buys. So, you have to be selective and frankly some of our stocks have moved so much that we are probably going to take some profits off the table on select stocks that have had huge runs.

Latha: Like which ones?

A: I prefer not to talk individual stocks but sectors like NBFCs and cement, some stocks have had fantastic moves and these are moves that are pretty eye-popping and clearly it is judicious to at least take some chips off the table while trying to find some laggard stocks maybe in the infrastructure set of sector were things have not developed quite as fast as people expected and other select stocks that would make sense.

Latha: I wanted to specifically ask you about public sector banks. If the RBI is opening up for a series of rate cuts, the bond yield has fallen a decent amount from April; April I think we were still at 7.6-7.7 percent on the 10-year and now we are sitting at 6.7 percent on the 10-year, they have made a lot of mark-to-market gains which will help them provide for bad loans — basically public sector banks.

A: I think that certainly helps the public sector banks but the fundamental business model of public sector banks doesn’t exist and the old days when you bought public sector banks because they were the biggest beneficiaries of falling long bond are long passed. I think public sector banks have a more fundamental business problem which is do they have a loan growth strategy, do they have the balance sheet and do they have the bad loan situation stop getting worse. I would say on that front and you are right that some of the bad loan recognition from here on or repairing the balance sheets, they can get some help from the profits on the bond gains. So, that helps.

I would say as important, if not much more important, would be the fact that the bad loan problem we may be getting towards the last stages of the big recognition. The public sector banks I would argue have been probably little more aggressive than at least a couple of the private sector banks which have dragged their feet a little bit in terms of bad loan recognition. So, I think that those two factors together along with picking companies where you have confidence that the management is going to be able to run it in a way that they don’t create a new set of headaches and it can participate in the loan growth in a reasonable way with some discipline.

If I were looking at public sectors banks and we are starting to look at them, so, the higher quality ones with strong management and some track record would be the ones that would be attractive and they look a little more attractive than maybe even some of the second tier private sector banks which have still dragged their feet and still have some big loan last recognitions taken.

Reema: India has actually underperformed the MSCI emerging as well as the Asia basket for three successive months as of September 2016. How are investors stacking up India vis-à-vis its peers?

A: To be honest, we don’t pay as close attention to these very short-term relative underperformance, outperformance. I think some of the other markets may have lagged a little bit more and had a little bit more value driven buying but I would say that at the end of the day India is the best medium to long-term growth story amongst emerging markets and that remains without saying.

However, having said that, valuations already reflect that exalted kind of position that India occupies. So, I think the real challenge for India remains that we are all buying it because we think that growth for companies in India as well as for the Indian broader market is going to significantly exceed what we can see anywhere else and so the part that I remain hopeful on but also nervous about is that broad based growth follow through in the market has been much slower to developed than in private cycle. I think that remains the biggest missing piece of the puzzle. So, I am not concerned about the short-term underperformance, I think India still retains unique advantages compared to most major emerging markets.