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In an interview to ET Now's Nikunj Dalmia, Pankaj Vaish , MD & Head - Mkts, Citi South Asia, gives his views on the road ahead for markets.
Excerpts:
In last one month literally we have seen it all, a scam, a great recovery and now a mild suspicion that Indian markets have topped out?
Yeah, that's right. We were talking right after QE2 saying that there could be perversely an area where actually US bond deals go higher, the dollar gets stronger and emerging markets and commodities, which were thought to be unambiguous beneficiaries of this may actually lag, so we are starting to see the Indian market sort of settle down. I would not say it is in trouble right now but it definitely needed to settle down and it has. Some of the highflying sectors have come off. We had also talked about a month ago, real estate becoming, and this we obviously had no insight into the scam or anything, but real estate clearly being too highflying a sector, so that's rightfully come off. So emerging markets like India still have a very good long-term story but need to settle down as they have done.
This is healthy. As long as we do not go deeply below the September breakout levels, we are okay but this sort of a pullback is healthy, I am not too worried about that. Conversely on the other side, the US market, which was another one we had talked about has blown through its old high and that is significant. So I feel quite good about that having taken place and at some stage may be the Fed will feel that a lot of this worrying perhaps was needed to the extent that they have.
So QE3 somewhere in 2011 is also coming?
I do not think we need QE3 at all right now. There could be questions asked, whether QE2 was necessary to the extent that it has been talked about. What happens is it is obviously very easy to be populist and it sort of serves us right to be worried about high unemployment rate. It is of course people's livelihoods and all that at stake but that's generally the job of the government, of the fiscal wing, so you should have fiscal policy geared towards that, you should have legislators working towards that.
I do not think it is Ben Bernanke's job in the face of 10-year yield selling off to the extent that they have, just say 'I am not going to move interest rates until unemployment comes down from 9.8%'. There should be other ways of addressing that, so I do not think QE3 is necessary and at some stage we may all look back and say 'was even QE2 necessary to the extent that that it was pushed and had to be sold so hard by Mr. Bernanke and others on the FOMC'?
Indian markets on an average have received about $2.5 billon this year but the month of December story is strikingly different. We are actually now witnessing outflows. Is this a typical yearend profit preservation mode or now they are seriously fighting and competing for capital?
Global hedge funds and having been one of them are just very quick at the trigger kind of traders and most of them have December yearend in terms of incentive fees and profit sharing. So if you suddenly see your year go away, you need to rush to protect it and pay people.
I do not want to read too much into it and I do not think there is a lot of leading indicator kind of information on it. It is simply coincidental and as in they happen at the same time, so as the market starts coming off, you will see within 24 hours, people's stop losses getting triggered and they saying 'I need to reduce my exposure'.
I do not think there is any kernel of a future information in that. If the market were to stabilise here and start rising, you will see all these guys running back and so I do not want to get too worried about capital outflows or inflows based on what has happened to December FII flows.
They all agree that longer term story is still good and on macro indicators, the budget deficit side have improved, on growth they have stayed very strong. We need to make sure that inflation and more importantly now the tight liquidity situation is addressed properly like the RBI has just done this afternoon on the credit policy issue.
As long as that is happening there, people will not be too worried. You will have different years of relative performance, so it will not be surprising at all if next year let's say the US market does better than the Indian market in terms of growth for the year but again that should not bother us because we have had two outstanding years and it is always healthy to catch your breath.
So what are the chances that early next year, we could touch a new high and then sustain beyond that previous high?
Because we got so close to the old high, touching that old high is a reasonable probability but whether we go beyond that and blow through it, that will take more effort and most importantly we will need to see the interest rate cycle turn friendly, which right now does not seem to be on the horizon. Ultimately it is a cyclical business, it will happen but there are still several steps to go through.
We need to get through the tight liquidity situation. We need to get through the inflation having clearly peaked beyond just the base effect and once all of that is demonstrated and we get into a benign interest rate environment, then we will sustain the blowing through the old highs and going. Until then, banks, real estate particularly. Banks actually I like because of valuation and because of the secular story in them but real estate, some infra clearly has funding issues and tight interest rates are just not going to help them.
Excerpts:
In last one month literally we have seen it all, a scam, a great recovery and now a mild suspicion that Indian markets have topped out?
Yeah, that's right. We were talking right after QE2 saying that there could be perversely an area where actually US bond deals go higher, the dollar gets stronger and emerging markets and commodities, which were thought to be unambiguous beneficiaries of this may actually lag, so we are starting to see the Indian market sort of settle down. I would not say it is in trouble right now but it definitely needed to settle down and it has. Some of the highflying sectors have come off. We had also talked about a month ago, real estate becoming, and this we obviously had no insight into the scam or anything, but real estate clearly being too highflying a sector, so that's rightfully come off. So emerging markets like India still have a very good long-term story but need to settle down as they have done.
This is healthy. As long as we do not go deeply below the September breakout levels, we are okay but this sort of a pullback is healthy, I am not too worried about that. Conversely on the other side, the US market, which was another one we had talked about has blown through its old high and that is significant. So I feel quite good about that having taken place and at some stage may be the Fed will feel that a lot of this worrying perhaps was needed to the extent that they have.
So QE3 somewhere in 2011 is also coming?
I do not think we need QE3 at all right now. There could be questions asked, whether QE2 was necessary to the extent that it has been talked about. What happens is it is obviously very easy to be populist and it sort of serves us right to be worried about high unemployment rate. It is of course people's livelihoods and all that at stake but that's generally the job of the government, of the fiscal wing, so you should have fiscal policy geared towards that, you should have legislators working towards that.
I do not think it is Ben Bernanke's job in the face of 10-year yield selling off to the extent that they have, just say 'I am not going to move interest rates until unemployment comes down from 9.8%'. There should be other ways of addressing that, so I do not think QE3 is necessary and at some stage we may all look back and say 'was even QE2 necessary to the extent that that it was pushed and had to be sold so hard by Mr. Bernanke and others on the FOMC'?
Indian markets on an average have received about $2.5 billon this year but the month of December story is strikingly different. We are actually now witnessing outflows. Is this a typical yearend profit preservation mode or now they are seriously fighting and competing for capital?
Global hedge funds and having been one of them are just very quick at the trigger kind of traders and most of them have December yearend in terms of incentive fees and profit sharing. So if you suddenly see your year go away, you need to rush to protect it and pay people.
I do not want to read too much into it and I do not think there is a lot of leading indicator kind of information on it. It is simply coincidental and as in they happen at the same time, so as the market starts coming off, you will see within 24 hours, people's stop losses getting triggered and they saying 'I need to reduce my exposure'.
I do not think there is any kernel of a future information in that. If the market were to stabilise here and start rising, you will see all these guys running back and so I do not want to get too worried about capital outflows or inflows based on what has happened to December FII flows.
They all agree that longer term story is still good and on macro indicators, the budget deficit side have improved, on growth they have stayed very strong. We need to make sure that inflation and more importantly now the tight liquidity situation is addressed properly like the RBI has just done this afternoon on the credit policy issue.
As long as that is happening there, people will not be too worried. You will have different years of relative performance, so it will not be surprising at all if next year let's say the US market does better than the Indian market in terms of growth for the year but again that should not bother us because we have had two outstanding years and it is always healthy to catch your breath.
So what are the chances that early next year, we could touch a new high and then sustain beyond that previous high?
Because we got so close to the old high, touching that old high is a reasonable probability but whether we go beyond that and blow through it, that will take more effort and most importantly we will need to see the interest rate cycle turn friendly, which right now does not seem to be on the horizon. Ultimately it is a cyclical business, it will happen but there are still several steps to go through.
We need to get through the tight liquidity situation. We need to get through the inflation having clearly peaked beyond just the base effect and once all of that is demonstrated and we get into a benign interest rate environment, then we will sustain the blowing through the old highs and going. Until then, banks, real estate particularly. Banks actually I like because of valuation and because of the secular story in them but real estate, some infra clearly has funding issues and tight interest rates are just not going to help them.
Have large-cap banking stocks corrected slightly more than wanted or these are actually the real estate levels for large cap banking stocks?
To me, large cap banking in this country is just so unusual to banking in most other countries, and I am talking about comparing in a sense commercial banks to commercial banks, not necessarily the old style, of course investment banks can go to zero, we know that but as steady as a SBI and how volatile that stock. These are high beta stocks and a 20% drop in some of them should not upset anybody, these simply have to be.
For household investors, they have to be thought of as must holds, part of your portfolio for the long-term India secular growth. Banking is still very underpenetrated in this country, so it just has to be a big part of your portfolio. For the traders, they can trade the volatility quite well, so clearly when they get to ridiculous price to book values, you can book profits and a 20% correction, 25% correction is probably a good time to have a short-term trade on but that's for professional traders who are trigger happy.
So Pankaj Vaish, the investor, what is he thinking and Pankaj Vaish, the trader, what is he doing right now?
As an investor, I feel still very sold on the India story, emerging markets in general but India particularly is a very strong story and for the last 2.5 years, I have put all of my compensation into the Indian market and I still feel good about it. Any pullback is a good opportunity to put more but this I am talking about 10-15 years, when my kids go to college, I want to be able to give them some of these Indian securities as graduation gift. Even bonds, power finance bonds, 10-year, 15-year, 20-year at 905, these are reasonable levels to start getting in.
For retail investors also?
Yeah. As a household investor, that's not a bad level at all. As a trader, we trade with much higher frequency obviously, so anything I may say I am liable to change, I may change my opinion within 24 hours.
Next 10 days, next 15 days, what are you hot on?
No, I do not want to say for 10 days what I will do because I may change my mind this afternoon about that but what I will tell you as a trader is there is a chance that may be Indian market corrects a little bit more, gets back to that September breakout level, that will be a very good stab for a short-term trade from the long side and I would like to do that. On the dollar, I feel that any pullbacks in the dollar should be bought, I am very impressed with how it has reacted exactly the opposite to what people thought going to QE2 and those sort of reactions happen once in a while, once in 4-5 years and when they happen, there is something to it just like the bond market sell off here.
People were very complacent, global investors were very complacent on bond holdings. This year something like $600 billion has gone into fixed income funds in US, at some stage people will not be happy about that and look to put some of it back into the equity markets instead, so those sell offs can go further and so I would like to still play the dollar strength.
If I look at history as a benchmark here, commodity rallies always have hurt us in the past?
That is true and that is why I do not know if we are done yet. We may need to come back down to the levels of the September breakout and that will be a good time for all relative sectors to, in a sense, line up properly. There is enough going on at this moment that the Indian market needs to settle down. I do not think a commodity led rally will be the backbone of the next leg up, so that's why I am not a 100% sure that we are done with the consolidation in the Indian market.
You are bullish on Reliance. Why is that?
That's a valuation call that our analysts have put out. Frankly the stock has gone nowhere for certainly over a year, may be two years, it has just gone nowhere. In my view the understanding with the ADAG was a very significant development. It basically in a sense opens up a lot of possibilities for the group to get into and they will be taking advantage of it. The team there of course is brilliant and they are not going to leave any opportunity unaddressed.
It should not be valued as any other traditional oil and gas refining company or a basket of that and retail or anything like that. To me it is a very good play on sort of a call option on future Indian growth as handled in the most sophisticated execution capability, so that's the overall view but specifically our analyst was looking at the valuation aspect of it and thought that the margin downside was well built into the stock price and so from here, things should improve.
Will telecom stocks emerge as strong leaders by the time we wrap out of the year 2011?
Frankly I just have a little bit of a bias, may be having seen the telecom carnage in the US but that business, you can trade it, you can certainly trade stocks for 20% bounces and all of that is fine. I do not know if it is a good secular story and they are great businesses but in some sense a lot of the stuff is built into the stock price and so you trade a white band based on competition heating up or pulling back a little bit, portability.
I hear the same issues as a massive exciting part of your portfolio for growth, I am not sure. So you just trade these 20% ranges and that's the best excitement in that and that's not to discourage, the businesses are great, they are run by great people.
What happens to the automobiles?
Autos were very well discovered last year and again from what my analysts tell me, they are okay. I do not think that again any big juice in terms of excitability at this stage is there and they are fairly well owned now. All mutual fund managers not just in India but overseas know the stories behind all the big names.
From that point of view again, I do not know if it is a big exciting story, just in terms of stock performance, obviously still good growth ahead but that's probably discounted a fair bit in the price.
So how would you write the India consumption story via banks, via autos or via some other sector?
Yeah, FMCG again I am told by my analysts is fairly well valued here. I would say in a 7-10 year horizon, I still like banks as very good, may be I have some biases, I understand the business is really well. It is a great way to play not just its own existing stock of customers growth but how much more growth further will happen given how underpenetrated the banking industry is and then capital markets growth as regulators ease up on some of the new product developments.
When I came to India three years ago, myself to my wife was this could be bigger than UK at some stage and I still believe that, so we are still not there in terms of GDP, we are not there in terms of many other facets of growth and products for household investors, for retirement. There is just corporate hedging. There is just a lot more that can be done and that's just more on some of the institutional side and then the vast consumer banking that still needs to take place in tier 3, villages, all of that stuff.
So that is a very good way to play this sector and it is well regulated, so hopefully the chances of anything perch-shattering happening. You have bribery scams and all that but frankly did it really surprise any of us that there is some amount of bribery going on in banks? I do not think so. Is it pervasive enough that you stop buying banks? I do not think so. It is a good way of playing the sector and hopefully the chances of negative surprises is limited in this sector.
If you have to isolate one big asset class, which could be potentially the big star asset class for the year 2011?
I have an idea but I do not know how crazy it is but I will stick my neck out and say it, with the provisor that a trader always has the right to change his opinion on no notice. I think there is a chance and I am trying to develop this a little bit to see how great a probability this is, right now may be it is still slightly below 50% but it has a probability and it is very low anticipatory, it has a probability of surprising everybody and that's just the dollar overall.
There is a chance that dollar vis-à-vis other developed market currencies could do quite well, could surprise everybody. It could be driven by US fundamentals, which might be improving, they are bad right now, no denying it and that's why the Fed is doing what it is doing but look at what has been thrown at it. You have effectively the world's biggest bank saying 'we will do everything in our power to lower interest rates' and not just overnight interest rates but all the way out to 10 years, that's a very large commitment for a bank to make.
Secondly and printing and all misses the point a little bit, I do not think we should call it printing but effectively they are just saying, I am a big buyer of bonds and I will make sure interest rates are low and will remain low but what does that do, it fosters more activity probably even in areas that already has low enough interest rates, so that's a lot of pump priming that's going on.
Similarly on the fiscal side, you have had now the tax cuts getting extended even for the richest Americans, which is also substantial. You are talking about 4-5% points, not trivial at all for the next two years and then again who knows if the Republicans win the next elections, the next big elections, may be they get extended even more. This is a lot of stimulus that has been thrown, valuations are not that out of whack now.
A lot of write-downs have been taken, so again there is a chance that the US market could surprise us both on the equity market side, even in pockets of real estate, I am not talking about Arizona and Florida but good old New York probably, that could surprise us and you could have the dollar be a beneficiary of some of the inflows. It is a thesis I am still developing. I am really not 100% sure of what the probability of success of that is but that could be the big surprise trade for the global community.
But is not that ironical coming from the gentleman who heads the South Asia business?
We have to tell it the way it is. We get judged everyday. I do not like to pound the table on just India equities all the time or Indian bonds, by the way Indian bonds are a great investment and who knows whether they first give you another 25-30 basis point of angst, but they are a great investment and so we have been having conversations with some investors.
There was the FII, that the capacity was just auctioned and several investors who have their own IDs and are willing to participate in it, they asked our traders for their advice and our Head of Rates Trading got on the phone and spoke to many of them who were very keen, they cannot believe you can get 8-8.5% between GoI and some corporate bonds with a currency that's largely stable.
So that's a good opportunity but we have to tell it the way it is, we just do not want to pound the table just because it is India that Indian equities, there are certain sectors that people should be wary of. Overall I still feel as long as the interest rate scenario is under control, a pullback to the September breakout levels is a good shot at rebuilding some portfolios.
What's your one idea for traders?
Do not pin me down too much now on the individual names, unfortunately I do not get as much time now in this role to look at each and every research report we do. Reliance you have sort of had point-blank asked me and I know that this one we had just upgraded. My view is that there are certain sectors that are a bit troublesome. Real estate, property prices have to still come off, they just do not make sense to me on many different yardsticks, so that area is you have to be careful.
Anything that's very funding dependent and could be vulnerable to tight liquidity squeeze, you obviously should be a bit concerned about. But you are right the longer term story, I like banks as a good way of playing it. As a trading idea for the next one year, I am thinking of the dollar strength a little bit and I would be looking at trades playing to that either through options or whatever.
So long IT as well?
No, I am actually not making a big call on dollar INR. Our global head, Anil was here last week. His view is that sell dollars and Euros versus a lot of other things including emerging markets and Norway and Australia and things like that. We do not have a big call on dollar INR and if you had to put on a trade, I would still say may be sell the Euro and buy the INR or something.
IT by the way also valuation wise, our analyst feel is somewhat full, it is obviously a great business and just one of the sectors that has done India so proud and frankly was the start of this entire bull market. We got recognised on the global scheme because of IT but for stock holders, it is not sure whether that is necessarily the best trade for the next 12 months but INR will do fine. It has got good fundamentals in terms of growth and yield differentials. I just do not know dollar versus the other currencies. There is a chance that the dollar could surprise us.
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