‘We are in the middle of a summer storm’

Fears over rising oil prices and trade wars have created nervousness across the global markets in recent weeks. Given the headwinds, MARK MATTHEWS, managing director and head of research for Asia at Julius Baer, tells Puneet Wadhwa that he does not expect the Indian markets to rally. But, with 15 per cent earnings growth in FY19, India would become attractive again by next March. Edited excerpts:

Do you think that the global equity markets are headed higher over the next six–12 months?

We are in the middle of a ‘summer storm’ and this happens once every few years. The last one was in 2011 — the summer of the Greek crisis. Rising interest rates, a stronger dollar and trade war, Chinese deleveraging have suddenly taken more significance. That apart, it appears the Angela Merkel government may not survive, as her key coalition ally is threatening to abandon ship.

There have been (political) developments in emerging markets (EMs) as well, with important elections in Turkey and Mexico. So, all these things have created a ‘summer storm’. And it should be added, the markets do behave seasonally if you average them out over time, with the beginning and the end of the calendar year the best phases, while the middle of the year is on average the weakest. Putting it all together, the next few months for the global markets should, at best, see sideways movement, and if not that, then the likelihood is we go down rather than up.

Are trade war fears firmly back on the table?

China has been a huge beneficiary of the current world order and has developed a huge export base, while it has protected imports. But, the fall in the Shanghai market, actually, is due to the fact that China’s self-induced credit tightening, a corollary of President Xi Jinping’s “de-leveraging” (debt reduction) programme, is targeted mainly at local governments. But, so far only one local government firm has defaulted. To stop at that would make the government look like a ‘paper tiger’ like the Americans in 2008, so it will likely allow more to fail.

Your views on the Indian equity markets?

India is a buy-and-hold market for us. We don’t approach India on a tactical basis. Buy it, put it away, and don’t think about it. It is a must-have in the global portfolio and one needs to own it for a long time. That said, I don’t see the Indian markets go up in this kind of global backdrop. The current valuations are steep, but with 15 per cent earnings growth in the financial year 2018–19 (FY19), they could become attractive again around March next year.

What is a bigger threat to the Indian equity story over the next 12–18 months — earnings not picking up or a hung Parliament?

The biggest risk to the Indian equity markets is the outcome of the general election scheduled for 2019. The Opposition is now figuring out how to be more unified. The Karnataka Assembly election is a classic example. If the Opposition can get its act together at the federal level, then there is a real risk that the election could go to them. This is much harder to do than at state level, though.

A coalition government isn’t always bad for the economy or policymaking, but in this case, the Opposition would be a very broad coalition. The current government is very strong and has undertaken a number of important reforms. In case a new government assumes power next year, these reforms may not be followed through. In case the Bharatiya Janata Party (BJP) wins, they may also form the government with more partners than they have now. But, is it the Prime Minister’s style to work with many different partners?

Foreign investors have been trimming India exposure over the past few months. What are their key concerns?

While foreigners have sold, the quantum is not too huge. The success of the recent IPOs such as RITES Limited and the subscription levels from foreigners indicate they are looking to enter India via this route. That said, the foreigners are not in a hurry to rush back in. The prospect of (PM) Narendra Modi losing the next general election is worrying them because, for the last four years, brokers have told them how great this government is. So they have come to believe it.

Which sectors/stocks in the Indian context are still worthy of investment?

I like State Bank of India (SBI). Stock prices of most public sector banks have factored in the scandals and the NPA (bad loans) issues. Among private sector banks, ICICI Bank is a good bet. NPA resolution should be faster and stringer in these two banks. I also like Larsen & Toubro. The pharma sector has lost a lot of value last year. It will benefit from the currency movement as well. Dr Reddy’s is a good stock to invest in.

INDIA IS A BUY-AND-HOLD MARKET FOR US. WE DON’T APPROACH INDIA ON A TACTICAL BASIS. BUY IT, PUT IT AWAY, AND DON’T THINK ABOUT IT. IT IS A MUST-HAVE IN THE GLOBAL PORTFOLIO AND ONE NEEDS TO OWN IT FOR A LONG TIME