Stock Market

Indian market to stay expensive, outperform; Robert Parker

Considering India is going to be among the fastest growing economy in the world, it is likely to stay an expensive market and be an outperformer, says Robert Parker of Credit Suisse sharing his outlook on performance of global equity markets with CNBC-TV18.

Growth in India can hold above 7 percent, Parker says, adding, as one of the growth leaders the country will attract fairly good foreign capital. 

On global market jitters ahead of the US Federal Reserve meeting later this month, Parker says investors are now increasingly focusing on what the US central bank will do in 2017 rather than in its upcoming September or December meets.

Next 2-3 years investors could be in for a sideways moving market globally with lot of factors like US Fed raising rates, high valuations or poor growth outlook putting a ceiling, he says.  Although, that does not mean it is going to be a ‘trend bear’ market, he says.

He notes Janet Yellen’s recent comment that the Fed targets zero real Fed funds rate means rates could be even closer to 2 percent by end of 2017 or early 2018 instead of anticipated 50 basis points. This is negative for global markets in the longer term, he adds.

Another market expert Jyotivardhan Jaipuria believes a long term investor can still buy the dips. He feels there is reasonable money to be made even from a one year perspective although not a very high return.  

On today’s local market correction, Jaipuria says it is a just a ‘minor blip’, adding, the fall will be have to deeper to qualify as a real correction.

Later in the day, CNBC-TV18 also caught up with market expert Christopher Palmer, Founder and Chief Investment Officer, Benson Avenue Capital and asked him about the turnaround seen in US markets. According to him, the correction seen on Friday in the US markets could have been a one-off event because of extremely low volatility and because of two catalysts. One, where most Fed watchers have increased their view that rates are going to rise and two, some indications showing Donald Trump doing better in polls, which did not go well with people on Friday.

However, now most markets are settling in with the idea that rates are going up. So, positioning is to stay long equity but be cautious on bonds and that is what is playing through right now.

The weakness seen in European markets could be due to weakness in financials over there, said Palmer.

Below is the transcript of Robert Parker & Jyotivardhan Jaipuria’s interview to CNBC-TV18’s Reema Tendulkar and Latha Venkatesh.

Latha: What does this look like, just a correction after practically 9 weeks of steady upward climb or is this more serious?

Parker: I think what has changed over the last couple of weeks and of course one has to focus on two background points which is that the VIX and other volatility indicators were very low during August and early September. So, that was giving us a warning signal in terms of the outlook for potential volatility in the market. I think the other factor that has changed in the last few days is that investors are not focusing on whether the Fed raises rates in September or December. I think there is a very clear consensus that they will actually raise rates in December and that has been my view for some time.

However what has changed is that the investors are now looking increasingly to what the Fed will do in 2017. I would come back to a statement that Janet Yellen made couple of months ago which is that she said the Fed target is to have a zero real Fed funds rate. So, if you believe as I do that next year we will see core and headline inflation in the United States averaging 2 percent. That obviously takes us to a position whereby towards the end of next year or early 2018 we could be looking at a Fed funds rate of 2 percent in contrast to 50 basis points now.

So, I don’t think investors are that worried about what happens this month or next month but they are increasingly looking to a sustained period of Fed normalising interest rates and that means higher US treasury yields. That in turn is a longer term negative factor for global equity markets.

Reema: So, the next Fed rate hike could be in December but the street is worried that in 2017we will see more Fed rate hikes than what was earlier priced in. Does that mean the sell-off or the correction that we are seeing in the global markets will persists? How deep could it be and what would be the time correction that you would give?

Parker: I am going to give you a very unsatisfactory answer which is that my view is that the global equity market rally which started in March 2009, if one looks at developed markets as opposed to emerging markets, I think the developed markets peaked in May and June 2015. The reason why my answer is very unsatisfactory is because I think for the next 2-3 years we could be in for a sideways moving market. Yes there are lot of factors which are supporting markets but likewise whether it is the Fed raising rates, whether it is some markets with very high valuations like America, whether it is the poor growth outlook, I think one can list a lot of factors which put a ceiling on the global equity market outlook. So, I don’t think we are going back into a major bear market as we saw in 2007 or like we saw in 2001 but I do think that the scope for an extended rally from these levels is very limited.

I think we have to focus at least in the short term on downside risks and to quantify that if you look at euro stocks, currently just close to 3000, I think that could easily go down to 2900. Likewise the S&P I think there is downside over the balance of this year down to around 1900.

So, I am afraid that we are probably going to have a bias to the downside over the next couple of months at least and longer term I think a sideways moving market.

Reema: Global markets sideways for the next 3-4 years, does India outperform in this period?

Parker: India is going to be probably the fastest growing economy in the world. Just to quantify that in 2018, a reasonable forecast for Chinese growth would be sub 6 percent perhaps between 5.5-6 percent. Russia and Brazil are coming out of recession but their growth numbers are going to be mediocre.

Indian growth I think on trend can hold above 7 percent. That as a growth hub and a growth leader will attract foreign capital and will mobilise domestic capital into real assets in India. Indian market is expensive but I think it is going to stay expensive.

I think generally emerging markets will outperform developed markets over the next 2-3 years as they have done already this year.

I think India will stay an expensive market and will probably be one of the outperformers. For foreign investors they are very impressed with the outlook for Indian growth.

Latha: Do you think these global jitters that have always been rewarding if you bought them, will again behave exactly as they did in previous occasions on Brexit and other occasions buy the dips?

Jaipuria: Yes, in some sense if you are a long term investor over the next 2-3 years I think it is still buy the dip, but the only point I will make is like you started with is the global easy money over, there are two legs to this global easy money and it all started in early 2009 when central banks across the world in a very synchronise manner were easing interest rates and were flooding the world with liquidity.

We know that at least one leg of it now is going to change, which is US even if they don’t increase interest rates, US is no longer going to cut interest rate, they are no longer going to pump in liquidity, so now it is going to be a diverse monetary policy compare to a synchronise monetary policy we have got use to for the last 5-6 years.

Reema: You said from a 2-3 year perspective it makes sense to buy the dips, what about from a 6 months to one year time horizon, how were you reading it then as Latha asked is it just a correction or do you see a reversal?

Jaipuria: I would say even for one year perspective we will probably still get a positive return from these levels. It may not be a very high positive return, but it still going to be a positive return, because the earnings growth trajectory in India is starting to turn, so we so far not really seen much of earnings growth come through, but I think slowly starting to turn, so by the time we are into late 2017 and we probably have more visible signs of earnings growth which is in double digit, which is 10 percent plus if we are lucky it could be as high as 15 percent, so that extent we are going to see the market give a positive return over the one year. Now the question which someone may ask is can I get the market cheaper, yes you probably can because markets are expensive today.

Some of these things are going to take time and as we have seen over the last two years earnings recovery just kept getting postpone. You probably can get the market cheaper. I think you will have a price correction as well as a time correction. It is like how you want to really play that correction maybe you can sell a bit, keep a bit in cash and then try and invest when things get cheaper.

Latha: What would you start buying already now? Are there stocks which look attractive or as the market dips which will be the first area you will enter?

Jaipuria: Like if you think about we have had market corrects for only 2 days, so there has been hardly a correction. Markets are up 25 percent since February end. To that extent what we seen is just a very, very minor blip so far. This can’t even we call a correction like market don’t fall more it is like when you look at the chart two months later you will not even notice the blip which came now. So to that extent you are firmly going to see if there is a correction it has to be a little deeper than that.

I think the midcaps are the area which I like, but midcaps are the area which probably up more expensive than the large cap, they are the area which have a tendency to correct must faster. You could see midcap come off 15-20 percent from where they were let say last week and that’s the area then you can start saying okay I have got these 20 percent pullback, so I got a 15 percent pullback and that’s what I really want to buy.

Latha: Which are the specific sectors would they rather be midcaps?

Jaipuria: In terms of specific sectors I like the consumer names and within consumer I think the rural consumers going to do even better than the urban consumer, but are good so rural consumer as well as urban consumer is a area I like. You have a whole range of sectors there I prefer the autos. In fact, the tractors and the other autos are something which I like the most amongst the big caps. The other thing I like is still who are gaining from commodity prices having been lower, so a whole lot of plastic processing names people who are gaining from oil prices have come down, so that’s another area which I like quite a bit.