The structural underpinnings of the long-term growth in India seems extremely solid despite the hiccups such as Fed hikes etc, said Madhav Dhar, Managing Partner, GTI Capital Group.
"The Indian economy is finally starting to pick up and accelerate and there is some movement on bad loans, said Dhar.
However, Dhar also specified that if US correction hits, it will take everything down with it. According to him, there are few clearer growth opportunities in the world other than India and the US.
Watch: GTI Capital Group says US stock indexes, Fed remain big drivers for markets everywhere Edited Excerpts: It has been quite a journey for the market, we are looking at fresh all-time highs, talking about almost 40,000 on the Sensex but there are still nerves out there in broader market – your sense on the rally, whether you think the midcap correction is over and we are good to build from here?
A couple of points, I hate to de-Indianise it, the S&P hit all-time highs and everything else is getting dragged along with it. So the most important factor remains the US Fed and the US stock market, particularly, the tech and the narrowing of the global cycle in terms of leadership.
The same thing is happening in India and the midcaps took a big correction, big beating. Hard to say whether it’s all over but obviously a lot of damage has been done and they are picking up a little bit but you are still about 80 percent above the long-term average trend of the midcaps. So, it is still expensive and still extended, so hard to say what will happen there.
But the Indian cycle continues, the good thing about India is that it started to accelerate in the last year and so even though there may be some global dampeners in terms of Fed hiking, the US bull market very old and extended.
The Indian economy is finally starting to pick up and accelerate and there is some movement on bad loans and there is some progress. So, it bodes well for us as an investment cycle picking up and to have a longer cycle in India. So it is a mixed bag but broadly encouraging.
Having said that if and when a US correction hits, it will take everything down with it.
So what is the right strategy to look at the markets? A Credit Suisse report said that US market valuations from a year ago have gotten cheaper because the earnings estimates for S&P 500 have gone higher?
I think stock markets is not a trade and it is not a stunt, it is a long-term commitment to the idea that you need to be broadly assigned with gross assets. There are few clear gross assets in the world than US equities and Indian equities and I am not saying this because I am an Indian. The structural underpinnings of the long-term growth in India seems extremely solid despite the hiccups we had, so the question is how do you invest in something like that.
You, invest in never selling. Every time there is a big hiccup, you buy more if you can, that is the way to do it. It is very hard to second guess stocks and much easier to pick bottoms and one should try and do that. The reason for it is because fear is instantaneous and more extreme and greed is slow and cumulative.
Market tops are very hard to stop, market bottoms are much easier to stop. So if you have a structural long-term trend, every time it looks bad you should buy more and not get out of what is a multi-year trend.
I find India the same way, there will be periods where there is stress in the system and the high to low correction maybe 20 percent. By the time you sell and buyback you are going to miss half of it anyways. So, this does not bode well for brokers or breaking news but that is the way to do it.
The point I am making, which is more intellectual one and not action point, is yes, we are late in the game. Valuations are extended even though earnings are rising both in India and the US. You are 10 years into a bull market in the US, the economy is extended, the Fed is starting to raise rates, the leadership is narrowing and those tend to be late cycle phenomena.
So there is little doubt in my mind that we are in a late cycle phenomena, whether it lasts six months or another year and a half, there will be a recession and the markets will correct sometime in the 18 months, there is little doubt in my mind.
The question is do you anticipate that, do you act ahead of it, I am not sure. You may go into a blow-off in these tech stocks, sort of like you had in 2000, you had in early 2008. So if it becomes visible, then something is going truly crazy, you can take some action.
Do you think that this could be perhaps building into a 2000 like situation as far as US tech goes and you are convinced that 18 months down the line we are looking at a recession. So even in India, is this a late stage rally then would you not be looking at buying what has already run up and in India, we know what runs up - private sector banks will run up, consumer stocks will run up. So how do you play this?
You are asking very bold and very difficult question and you are probably right. I think you do not necessarily want to chase that but what happens in late stage is what is working becomes a momentum trade; like you are seeing it in the US that you narrow it to broad tech then you narrow to big tech companies such as Facebook, Apple, Amazon, Netflix and Alphabet's Google (FAANG) and last night you had a big move in the market and only Amazon was up in the US.
So yes, I think what has worked which is high-quality private sector banks, all at very expensive valuations. Tech, banking, credit and general has done fantastically. Everybody knows that is the big secular growth story in India which I happen to believe but it has done extremely well, everything from HDFC to Bajaj Finance and so on and by temperament, I tend not to chase those things.
But it is hard to say because when you go into a blow off, the things that are already extended get more extended. It is not the rational thing that happens. It's the momentum trade that happens.
So yes, it is possible that you go vertical and it is too early to short or too early to get skeptical about these things because the broad underpinnings of investment psychology and earnings momentum which are not to be sneezed at are very solid. So I think it runs longer.
These regular corrections are fine. When they come everybody starts to panic and it will be no different the next time as well, but the one that I am talking about is a big one. We have not had a big one since 2008. So how far is that according to you?
A: I do not see a big one. I think 2008 was so devastating. Big ones will only happen if economies completely unhinged. So I see the US economy correcting, the Fed but the unhinged has already happened even though we have come so far so not forget that the S&P from 2000 peak only surpassed its peak a few years ago. So, for 12 years you were sidelining although it didn't look like that because we were straight down and straight up. So I do not see a big one at all.
I think the world is in a much more solid place and frankly in a desynchronised place in the sense that Europe is still flagging, the US is overheating, India starting to pick up, China starting to slowdown.So for the world in aggregate is sort of a healthy thing although your country picking and stock picking becomes more important. Systemically the world is a safer place where cycles are desynchronised.