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India a disappointment for those who expected a better market after election: Mark Matthews

ET Now|
Updated: Jul 22, 2019, 02.52 PM IST
Mark Matthews2-Julius Baer


  • Silver is doing better than gold, but you are better off owning stocks.
  • We are bullish on Infosys, SBI and ICICI Bank.
  • Sensex is capped at 40,000 because the economy is still weak.
Increasing taxes for the middle class and rich Indians was the thing that really took steam out of the market, says Mark Matthews, MD, Julius Baer. Excerpts from an interview with ETNOW.

It is quite ironic that Indian markets are suffering at a time when the world is celebrating. 2019 has been a good year for all assets across the board.
You are right about that. India has certainly been a laggard this year. There is disappointment for those who had anticipated a better market after the election.

What do you make of the new tax on the FPI front in terms of surcharge? Is this something that is going to have a serious problem in terms of repositioning Indian equities and the post-tax returns or is this something markets will ignore and move on?
I do not think that was the major problem in the budget. When most foreigners invest in India, they do it for the long term. But increasing taxes for the middle class and the rich Indians was the thing that really took steam out of the market.

HDFC Bank has cautioned of the sentiment which is prevalent currently with regards to commercial vehicles, stress in the agri sector and their own retail growth slowing down. Would you say that this is a sign of bad times as not just the beleaguered ones, but also the big fish are sounding red flags?
I wish I could say no, but the answer is yes. We saw that auto sales for the June quarter are down 18% and there is simply no demand for loans right now. So it is unfortunate, but that is the lay of the land. There was hope after the election's strong majority that you would see more and more government spending. That simply has not come through yet.

What is the outlook on the report cards of tech majors? How have you read into the commentary from the big IT players and where would your preferences lie?
Well, we like Infosys among the big IT players and all of our stocks are very specific. I mean having just said that bank results are mediocre and there is not lot of demand for loans, we do like SBI and ICICI Bank. We also like some of the more defensive counters like ITC and NTPC. So, we are selective in India. I still think there is a very good case for being invested there. It is just that it is not immediately apparent in the numbers right now.

Is long US 10-year now the most crowded trade in the world? It is a consensus view that Fed would cut rates either 25 or 50 bps which is a change in what the Fed communicated at the beginning of the year versus where they may end the year.
Yes, I think so. In fact, we sold treasuries well over a month ago and felt that the yields had overshot; they are too low now. Last week seven Fed officials made statements and what we gathered is there will be a rate cut at the end of this month, but it will only be 25 bps. That caused quite a short reversal in the futures market where up until Friday, the market had been pricing in a 40% chance of a 50 bps cut next Wednesday; that has come down to 20% now. But there are some market participants who think it is going to be 50 bps. When they are proven wrong, which I think they will be next Wednesday, then you could see a reversal in that treasury yield with it going back up. Yes, it is a very crowded trade and the yield should rise.

Are we setting ourselves up for a flat-to-negative return for the second half of this year? The headline for the first half has been strong and supportive, but that may not be the case for the second half. What happens to the markets if that is the case?
Some things will do well and some of the stocks will do less well. On balance most stocks will still do well because even if the treasury yields are heading north, it is not like going well above 3%. The central banks around of the world are going to continue cutting interest rates. May be, the Fed will just cut rates once -- a 25 bps cut -- but that will be the catalyst for a whole bunch of other banks to start cutting.

With that low interest rate environment, you will see interest in risk assets and other assets that have yield. In the second half, I would make a case for value stocks, which have underperformed growth around the world for quite a few years in a row. They do have value as the name suggests and they do have growth. Growth for the whole of the S&P may be about 5% in the second half. In the first half, it was 17%. You would not get another 17% but I do not see why we could not get 5%.

The second quarter earnings are coming out now. Admittedly, only 80 of the S&P 500 companies have reported but they are actually reporting profits of about 4% or 5%. If memory serves me right, that is well above what the consensus had looked for and so I think, there is definitely a case for remaining invested because interest rates is still very low and the world economy is not in that bad a shape.

When it comes to India, given the kind of sharp reversal that one has seen in yields, many brokerage and market men believe that the relative multiple of equities to bonds is now entering a buy zone and that there is a fair chance that equities, because of this sharp reversal in the yields, may actually be able to hold up. Do you buy into that point of view?
I am not exactly sure if I would say you should buy Indian equities over bonds because there is value in the bond market. But I do believe the RBI will cut again because inflation is low and the economy is sluggish. That should offer support for both obviously. But my feeling is that the earnings growth of banks are warning us that we are not going to get 20% earnings growth this year. But even if it is let's say around 12%, that still will make India have among the highest earnings growth in the world. So, it can also do fine in the second half. As I said, I would not look for 17% in India either. But the Sensex is capped at 40,000 because the economy is still weak and the appetite in China is actually improving. That means the tension for India could be diluted a little bit and these banks seem to be weighing on the market. So, maybe 40,000 on the Sensex for the next couple of months. But after that I still think you get 5% between now and the end of the year.

Ray Dalio wrote that we are not far away from a very large credit cycle risk in the global economy and it is time to revisit gold. Do you think from now to 2021-2022, gold should be 10-15% of the total allocation? Investing in gold in the last five-seven years has not made money. Is it time to revisit the precious yellow metal again?
Yes. Actually, I would be more specific. I think silver is much more attractive at this point because gold has rallied very strongly. The gold ratio is a little below 80 and historically whenever it is above 75, silver will rise around 10% over the next 12 months. So, I prefer silver over gold. Number two, I would not have more than 10% of my portfolio in gold. I just do not think it is necessary. It does not produce the yield. It is something that you want to own as an insurance really. As it is supported by the dollar, it probably is not not rising a lot in the second half. Really, the primary driver of gold prices is purchases of jewellery in emerging markets and, of course, India is one of the very big ones. So if the rupee goes down, people can buy a lot of gold. If dollar is flat, that is supportive for gold. The other thing is that China has been starting to buy gold for the first time since 2016 and they will continue to buy gold. But does it need to be 15% of your portfolio? No, that is too much. I think you are better off owning stocks.

Also Read

Broader index expensive, but several subsets are attractive: Mark Matthews, Julius Baer

Value and cyclical stocks to outperform as global economy accelerates next year: Mark Matthews, Julius Baer

Not a V-shaped recovery, but things to improve in next 6 months: Mark Matthews, Julius Baer

Mark Matthews on why Julius Baer is underweight India

A risk rally’s starting now, go for mid and smallcaps: Mark Matthews, Julius Baer

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