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

ET Now|
Sep 11, 2019, 01.10 PM IST
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Mark Matthews2-Julius Baer

Highlights

  • In the absence of growth, not much foreign money is going into India.
  • The legacy of demonetisation could still be with us.
  • As investment engine is not picking up, focus is on consumption.
Not just this month, but probably from now until the end of the year, we are going to get a nice risk rally, says Mark Matthews, MD, Julius Baer. Excerpts from an interview with ETNOW.

China has removed all hurdles to foreign investment. What could that mean for markets like India? Is it disadvantage India prima facie?
I do not think so, because most foreigners used the stock and bond connect programmes that were established a few years ago to access China. They are a lot more flexible and they are a lot cheaper. The QFII programme was important prior to that, but it is a legacy now. It is not how people go in and out of China.

What is your assessment of the current situation globally? For now, equities seem to have moved past recent concerns. Do you see that as temporary yet again?
The US is just a whisper away from an all-time high. It is continuing to lead the rest of the world. Their economy looks fine in my opinion. The average hourly wages of people are still rising and the participation ratios is at 10-year high. So the most important economy in the world is doing fine and Europe is not doing so well. The big thing to watch tomorrow would be size and duration of quantitative easing that they are probably going to announce.

In Asia, the most important economy is obviously China. The economy is not that great, but not bad either, just in the middle, I was there myself two and three weeks ago. On balance, in this environment with very low interest rates and decent economic growth, equity markets can go higher.

How does India stack up in the current picture vis-à-vis other Asian markets, particularly in light of the current global picture?
Unfortunately, it does not look good because of its costs. It has always been an expensive market, relative to its peers and people have always been willing to pay a premium to own India, because of its growth. From the latest economic numbers, we can see the growth is slowing down. India has many other attributes but the primary thing that attracts foreign money is growth. In the absence of growth, you would not get as much foreign money going into India because it is an expensive market.

But the broader end of the market is relatively cheaper. Small and midcaps have been hit hard and the underperformance has lasted for a while now. There are those individual pockets where growth visible and intact. Anything that you would like to bet on there?
I would still say that the small and midcaps valuations are not exactly cheap compared to the rest of Asia. It is cheap only relative to the Nifty. But within the small and midcap space, there are many good companies that we like generally. Given the underperformance it is a place to be buying things.

Do you expect an earnings revival within the next couple of quarters? How worried are you about the slowdown in India given that we are still growing quite a bit faster than the rest of the world?
The FM has been talking about how the millennials are not buying as many vehicles any more. That is very interesting. There has been a technological shift around the world, India is as much part of it is as any other country. That explains some of the important changes in spending patterns and therefore people look at key economic numbers like vehicle sales as an explanation for that. In other words, it is not that the economy that is really bad. It is just that millennials who are using Uber!

But if you look at the most recent reporting season, more companies missed than beat the forecast. I do think the earnings forecast will be revised down and I do not know exactly why the overall economic growth picture is as lacklustre as it is, but it does occur to me that the legacy of demonetisation could still be with us and basically the unofficial economy may have been much larger than any of us realised. Therefore, the drag of that is still being felt in the numbers that we are seeing. Obviously the unofficial economy was never tabulated in the official numbers but it would have had a very strong trickle-down effect.

If you have to invest right now, how much ready would you be to dip your fingers into the Indian markets as a percentage of your portfolio? Even not taking money off the books is a good sign, Would you be in the front liners in perhaps financials? What would be the ideal mix?
We have had a preference for banks for some time and the move to consolidate that sector is a tremendous positive. There are too many banks and reducing them will make the financial system much more efficient. Banks still remain a good hunting ground. Also the small and midcaps is a good hunting ground.

But do you not believe that there is a structural shift with regards to autos, especially here in India because of the transition to electric vehicles? A lot of people instead of owning cars are going for rental models like an Ola or an Uber?
I have not even thought about in the context of India, until I was listening to you. But that makes good sense and gives me a lot of comfort that the vehicle sales numbers are not indicative of something darker for the economy.

Going forward from here, we still consider consumption as a big theme going forward. Is that something that you continue to be confident on? Would you cool off towards that sector given the recent performance and valuations we are seeing in some of those counters?
You are right. It is the engine of the economy. There are basically two engines to any economy -- consumption and investment. The problem with India is that the investment engine has basically been switched to a very low gear for the last few years. Given that there is no real sign of the investment engine picking up, I would continue to focus on consumption.

Where within consumption do you find comfort?
I will have to say that it would be in the rural side. Fast moving consumer goods (FMCG) and other items which are affordable to people who have less money, should be where the focus is. The government continues to intensify efforts to build the economy and the rural areas.

What are you tracking going forward? What are the immediate triggers? Are you eyeing the dollar index?
I do think that in the United States, the Federal Reserve will continue cutting interest rates and that will continue to support the S&P 500 index. The second quarter results were better than expected. I think the US market will be sideways or up. I do think the dollar will remain flat or strong, it will not go down for the simple reason that the European Central Bank would be even more dovish than the Federal Reserve has been.

But after the terrible August, we will get some mean reversion in risk assets. We have already started that in emerging markets and India is an emerging market. So, things look good and most importantly, people got too bearish on the global economy and it is not as bad as the government bond yields would make you think it is. Not just this month, but probably from now until the end of the year we are going to get a nice risk rally.

Also Read

Mark Matthews on why Julius Baer is underweight India

Main thing keeping foreigners away is India’s weak growth: Mark Matthews, Julius Baer

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

India’s a thriving economy, but very expensive in global context: Christian Gattiker-Ericsson, Julius Baer

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