Money will be moving from private to PSU banks: Mark Matthews, Julius Baer

Mark Matthews2-Julius Baer

Barring the opinion polls getting it totally wrong, if the government does get a new mandate, the market will continue to rally higher. The whole global setup looks very constructive with the S&P just 2% from its previous high. A lot of signals in the United States about things like lower interest rates, modern monetary theory seem to becoming very prevalent on Wall Street these days, which basically means a lot more fiscal stimulus. Going into the first quarter results, where the consensus is looking for a decline of 2%, if the numbers beat that, then we can continue to roll higher or even touch 3000 on the S&P.

Would you say that for India, the key challenge is going to be crude? Crude is now back at a five-month high. Whatever the outcome of the elections ahead, would the ETF inflows into emerging markets out of which India is a big beneficiary, continue to stay afloat for us?

If I thought that the oil price was going back to a $100, I certainly would not like India. But we do not feel that. We feel that the prices should not really go much higher than it is now. The Saudis are cutting their production quite significantly along with other OPEC countries. We do have signs of sluggishness coming out of Europe which is a big part of the global economy. If oil price was going to keep marching higher, I would worry more but I do not. I know it sounds strange, but the chart of Nifty and oil tend to move in the same direction in the long-term chart.

In last five years, earnings have not been great but the Indian economy has been on the right side of global growth. Structurally, crude prices have been benign in last five years and yet Indian economy or Indian corporates have not achieved anything grand. Some argue that even if the current administration comes back, what will actually change on the ground?

Stability is what the market would appreciate in my opinion. A totally new government would bound to include new policies and new people. After a while, the market would get used to that but at least in the beginning, they would not like it. Coming to your point about a whole raft of new policies, I would agree that there will be a continuation of the policies that have already been put in place and one could argue that some of those policies have been market negative. For example, the GST and demonetisation. By the way, we are not overweight on Indian market at Julius Baer, we are neutral on it right now.

Let us look at the long-term scenario. In eight out of 10 times, Indian markets have gone higher in any election year irrespective of the market verdict. Do you think that irrespective of who becomes the next Prime Minister of India, in the long term, election is just a pit stop?

At the last election, there was an additional rally of 20% eight months after the BJP won. So, if they do not win this time, I believe the market will go down quite strongly because it is pricing in that they are going to win but it is not quite sure. I do think that once we get the news out on the table, it could move higher in tandem with general continuation of risk assets performing well globally.

The last point is, it is not really election related. It looks like finally the non-performing assets of the banks are over as we saw from the SBI results and therefore, a major sector that has been holding the index back could now move higher.

DIIs of late have taken a back seat. What is your view on the liquidity situation? We have seen a lot of money pouring in from FIIs of late. Is that trend here to stay?

I do not want to sound cavalier but I think so. Donald Trump and Larry Kudlow were talking about rate cuts. Of course, they are not in-charge of rate policy but they have just appointed Stephen Moore and Herman Cain to the Federal Reserve Board. Both are very dovish. The Federal Reserve does seem to be a lot more dovish this year.

Coming to ECB, the market does not expect a rate hike in Europe until the second half of 20-21 and China economy seems to have bottomed in China. So, there is a pretty constructive outlook for the emerging markets and much of the fund flows these days are passive. In other words, when people buy emerging markets, they are buying an ETF and a certain part of that therefore has to be India. In that backdrop, you will see passive money continuing to move into emerging market funds and therefore certain allocations will come into India and push up share prices.

The foreign investor has had a long lasting love affair with Indian private banks and that list has been very restrictive, especially of late, when there were NPA as well as IL&FS liquidity concerns. Do you sense that love story could go beyond the top three private banking names?

I agree that the story is now moving toward the public banks and their share prices are so far below what they have been in the past. They are so much cheaper than the private banks. It makes total sense to me that you should see money — not just foreign money but money — moving from the private to the the public banks.

What about earnings growth? Do you believe that the earnings forecast which seems to be fairly high is on expected lines and is that your expectation as well?

History is not on the side of the consensus in India meeting its forecast. They generally aim too high but even if you shave off 15% or even 20% from the earnings growth this year, it is still a very high rate of growth and not enough to make India cheap. Earnings growth will probably not be as good as what the consensus looks for, but it will still be good.

Where is the opportunity? The murmurs from some of the top FMCG names is not all that strong. There has been a slowdown in auto industry. Is this a great opportunity to nibble into any of these names or is the consumption slowdown in urban India going to linger on for some more time to come?

We are in an election year, which means a lot of goodies is being thrown around by both parties. I do not think that consumption should be weak but in terms of identifying pockets of opportunity, one that really stands out is the public sector banks. I think State Bank of India turning from major loss to major profit is a very clear sign that they are over the worst and are looking at better times ahead. The share prices still does not reflect that.