Arvind Sanger, managing partner, Geosphere Capital Management, spoke to CNBC-TV18, says oil is the wild card that could upset Indian economy but growth is getting better globally.
Is 3% 10-year good news or bad news. It signifies very good global growth and then it signifies that money is going to come in expensive. What should it mean for an Indian investor?
I think that it is a slightly less favourable macro. Clearly, everything else being equal, cheaper money is always better for equity markets. However, if the expensive money is coming when growth is doing better, we can tolerate the more expensive money. So, more expensive money is never better, but it is easier to handle if growth is better and right now growth seems to be better.
However, I guess the wild card that could upset the apple cart card for India is oil. If inflation goes up and Reserve Bank of India (RBI) raise rates, which the last policy or the last minutes that came out suggest that could be more of a tendency to move in that direction, those are all significant but moderate headwinds.
On the other hand, the global growth side like you said, globally and in India, growth is getting better. So, I think we have two opposing forces and hopefully and seems to us that growth would be more important as long as that remains on track.
The big talking point yesterday was Tata Consultancy Services (TCS) and the company hitting $100 billion market capitalisation. Indian IT has been left behind a bit, you reckon now it is a big comeback and do you reckon it is backed by growth or it is just valuation catch up more than anything else?
I think it is a little bit of everything. Infosys guidance was not exactly growth boosting in terms of the margin guidance they were giving. However, I think the reality is that the rupee weakness creates a tailwind for those companies. If this yield curve is steepening a little bit, that is good for the banks and financial companies in the US and that in turn turns out to be good for IT companies.
So, I think the IT companies, valuations also on a relative basis to the rest of the market are somewhat more reasonable to play for growth, and so far a number of reasons it can see a little bit of a buying. However, we still think and yes we are looking at some of the IT companies, but I think you were talking a little early about the metals and mining, and I think that is another area that we like.
So I think some of the outward facing sectors could also start to see more money going into those and some of the easy money that has been made in the last two or three years, in the banks and the NBFCs, you could see a little bit of repositioning. However, it is not like global growth is completely going away, it is still there, but some of the easy winners of the last couple of years may not be the ones going forward.
The fear is that the US economy could sort of meet its inflation target of 2% and thereby hike rates faster than what the street was expecting. However that was the fear that the street had even a couple of months ago. Do you think Indian investors need to worry about that?
I think so because at the end of the day India is not an island that is de-linked from global economies. India got a couple of major tailwinds in the last few years, one of which was the sharp fall in oil prices starting in late 2014 and that helped, both from a managing the deficit, the current account and the fiscal deficit, and you had the tailwind of continued easy money around the world.
Now, easy money has slowly, at least from the US side been going out of the system or being pulled back. But I think if this accelerates this year and people are talking about, some estimates are there for four rate increases this year, that certainly suggests that the risk of that causing some kind of a sneeze in the US causing emerging markets to catch a cold, is becoming higher. So the risks are going up from a macro standpoint.
Whether it will cause things to keel over or not in terms of markets, is hard to call, but I think clearly those risks are there and the oil risk, if oil keeps going and it is $80, which is certainly not inconceivable, it has gone from $70 to $75 in the last few weeks, so why could it not go further given how tight supply demand is looking, those are I think factors to keep in mind that can cause a bit of a sell-off. It does not mean it is the end of cycle, but it certainly means you could see risk off major corrections along the way.
How big is politics a factor for this year? Yesterday, we had Christopher Wood of CLSA saying that the rally is at risk if PM Modi is not re-elected. Your thoughts on how the build-up to 2019 could pan out.
I think political risk is higher today than we would have figured six months ago, not just because we are six months closer to the election, but also because the tea leaves are looking a lot more uncertain in terms of BJPs strength and prime minister Modi's strength. However, I happen to believe that India is more resilient than one man and one party and plus, I do not believe there will be a major shock, it may be a much more weaker BJP government which may not be the worst thing in the world.
I think India does well with weak governments, so, it is not like strong governments cause a great market performance and weak government's don't, but a weak BJP government is still I think fine and I am not that concerned from a medium to long term, but I think the market is going to. So from a market risk standpoint that is another factor along with as you mentioned the US interest rates as well as oil prices; those are to me the three horsemen that India has to worry about as being harbingers of some risk in market.
We were discussing about how many sectors in India could do well. What kind of sectors would you like, for instance IT, and cheaper rupee, rupee is going to 66.50 per dollar now, that will mean steel companies and so many other companies facing import competition will have more pricing power. On the other hand I think consumption has looked very good this result season. Look at the NBFC numbers, Cholamandalam's disbursements have risen by 54% , I mean the consumption is unbelievably strong. So therefore what kind of sectors at these valuations?
We are seeing great growth and the real question is we are just coming out of several quarters of disappointments because of GST last and before that demonetisation and so growth is clearly accelerating. The problem with every cycle is growth is strongest before it rolls over right, the recessions come because growth is very strong and banks have to raise interest rates and then growth period is out. So I think the growth and the earnings recovery is going to be the story, but whether it is the financial companies and we still own some NBFCs, we think there is still room to play or whether it makes to rebalance the portfolio a little bit in terms of some of the beneficiaries of a weaker currency and less affected by higher oil prices and higher interest rates, I think to us the mix has to include an environment where some of the growth drivers that we are starting to see may not have the same tailwinds that they had coming into the year.So therefore this quarter's numbers are great, but we have to see what does $75 oil plus RBI raising interest rates mean for some of these sectors. So I still like some of the domestic sectors, but I think our preference would be to rebalance it a little bit with some which benefit from a weaker rupee.