Equities Will Continue To Upstage Gold, Real Estate, Says Arvind Sanger
The real India story isn’t in the huge foreign inflows, says Arvind Sanger.
Equities will increasingly be treated as the favoured asset class in India compared to gold and real estate, said Arvind Sanger, managing partner at Geosphere Capital, on BloombergQuint’s special series Thank God It’s Friday.
The real India story is not in the huge inflows from foreign institutional investors, but rather in the way domestic liquidity is treating equities, he said. Sanger also added that the upcoming Goods and Services Tax regime will cause disruption and a lot of confusion in the near-term as India’s system is much more complicated than in economies where the indirect tax regime is already in place.
Here are edited excerpts from the conversation.
Arvind, thanks for joining us. Before we go and address the Indian markets, I’d like your view on the global macros currently. Are you seeing any signs of risk off and what does it mean for emerging markets?
Well, no, I think on the global front things seem to be fine. I mean, European growth seems to be continuing to be stronger than what many had feared as recently as a few months ago, a couple of quarters ago. So that’s good. U.S. earnings’ growth this last quarter also was a pleasant surprise after seven or eight quarters of tepid or non-existent earnings growth. Now we have earnings growth back on track for U.S. companies.
So I think that growth on a global basis is looking better, and India is also seeing signs of it. So, on a global basis the risk is very much on and as we have seen from the U.S. interest rate cycle, despite the Fed talking about raising interest rates, and being on a continuous rate rise cycle, what we’ve seen is U.S. yields fall sharply, suggesting that the market does not think that the U.S. interest rates are going to rise by quite as much as the Fed is suggesting. So I think the market is quite sanguine about the U.S. Fed, which is the only major central bank that is doing any tightening and that’s not causing any great stress in the system.
How are you viewing the development in the crude oil prices? Your expectations, and how do you think these dynamics will play out for India?
Well, I mean I think India’s been a huge beneficiary of just one major fact, which is the Shale revolution, and one of the things most astounding to us is that with about half the rigs working, drilling for oil in the U.S. Shale today, as we’re drilling for Shale oil in 2014, over the next 12 months, the expectation is that the U.S. will add almost 18-19 percent of the production that it added in 2014.
So there has been a huge improvement in productivity because of finding new plays and finding existing wells much more productive. That’s what keeping a lid on oil prices despite OPEC nodding, U.S. production growth, Libya and Nigeria coming back faster than expected. But the bigger concern in the market is that come 2018 the oil market will be over supplied if OPEC wants to come back. And if U.S. is bringing over a million dollars a day, there won’t be enough room for OPEC and non-OPEC to bring their barrels into the market. So I think oil prices are going lower to force U.S. Shale to curtail some of its growth. And I think India is obviously a big bidder of that kind of a backdrop because oil is one of the biggest kind of equipment drivers, current account deficit drivers as well as one of the important factors in domestic inflation. And for all those reasons I think it gives a lot more room for RBI to cut rates. I think it’s a win-win all around.
Fund flows in debt market remains robust. However, when it comes to equity markets, fund flows have been tapering to a certain extent. And now we have the case of China A shares being included in the MSCI indices. Is this a concern? How you’re viewing emerging markets and in India specifically with respect to fund flows?
Well, I think if you’re looking at global fund flows, India is clearly well ahead of other markets in terms of valuation. So, people are always looking for value buying. But I think India still remains one of the favourite destinations because, on a growth projectory basis, there is much more visibility of growth. On a political stability basis, there is much more confidence in political stability. For all those reasons, India still remains one of the favourite destinations. But that doesn’t mean when Brazil was hugely oversold after the whole concern regarding impeachment of previous President, you had a lot of funds flow coming to Brazil and that was one of the best-performing markets last year. So, you have other markets that see funds inflows. This year Mexico which had suffered last year under the rhetoric coming out. For President Trump or a President like Trump that has not translated into anything much. Mexico has seen funds flow. You will always see other emerging markets that have lagged.
I think the real India story is not whether there is a huge upsurge in foreign institutional investor flows, but the domestic liquidity that continues to increasingly treat equity as a favoured asset class as compared to other asset classes like gold, real estate, and that’s I think is the cycle that will last for a while.
Would rather stay away form making incremental investments in India right now and wait for the entire Goods and Services Tax-led disruption to play out especially given that there are beliefs that it could impact earnings for a quarter or two.
Well, I think clearly valuations are not cheap, therefore there is no compulsion to go out and buy right now. And you are absolutely right, one of the things that is somewhat disappointing, but maybe it will always be the case, is that when there is major project being implemented there will be a lot of problems.
The businesses don’t seem ready. The tax system is unfortunately much more complicated than in any other major economy that introduced GST. This may reflect a compromise between the states and the Centre. But whatever the reasons it is going to cause disruption, and a lot of confusion and some dislocations.
We don’t think dislocations will be tremendous but for one-quarter certainly, you know there will be some minor issues and dislocations, and some earning predictability, and so if it does, it will be an opportunity we would welcome that. We are not saying if it doesn’t we are going to get a big chance, you never know what causes the markets to pull back.
We know that you have an interest in Indian crop protection and chemical industry. Considering the valuations at which these stocks are trading at, would you advise investors to move in. Do you see you still see a substantial upside from an investment point of view or would you rather wait for a correction?
I think at this point it’s hard to pound the table and say that most of the crop protection or chemicals related stocks are undiscovered stories and that valuations are cheap. In almost every sector, including NBFCs which is another area that we like, we would say that bringing a lot of money to work at these valuations is probably risky unless you have a very long-term horizon. But you know in a short to medium term we think there would be some opportunities to buy at more attractive valuations.
The biggest challenge in today’s market is to find value. Would you still believe that any undiscovered themes or themes which you would still like to bet on even at current levels in India?
No, I wouldn’t say there are individual themes that we can bet on at this stage in India. There are always individual stocks that one can buy. One of the themes that we liked recently which is the domestic hotel industry. Valuations have moved up but that’s a cyclical industry that has gone through several years of very little demand growth and almost no pricing. And we have started to see last year both demand and pricing started to move. GST does create some confusion and trouble in the higher end. But again, maybe GST brings opportunities but I would say that undiscovered themes are hard to find but individual stocks where valuations may get attractive for whatever reason, is probably easier to find. I mean you don’t want to pick undiscovered or cheap theme stocks, that would be Pharma and I.T. And while we don’t do much of pharma but it probably has a better outlook because I don’t think the U.S. government is going to be quite as draconian on pharmaceutical prices as people are concerned about as I.T.; whether it is the H-1B visa issue or it is the technology challenges in terms of automation. Those challenges, I don’t think are of a short-term duration.
