Thursday, December 22, 2011

No V-shaped recovery in markets this time

After removal of some FMCG, IT stocks from benchmark index, one can see that markets are much lower than they appear

With money printing in the US and days of monetary and fiscal stimulus behind us, one can only expect a slow recovery in the markets this time around, unlike the quick rebound in 2009, says Mr Anand Shah, Chief Investment Officer, BNP Paribas Mutual Fund. In an interview with Business Line, Mr Shah also discusses on what drives gold prices now why gold as an asset class is not comparable to equity.

There is a general view now that markets have factored in negatives and valuations have reversed to the mean. But then does the earnings concerns now make it less comparable with historic data?
Markets have corrected significantly and rightly so because we are going through abnormal times because of the political stalemate for a long time now, since the 2G scam broke out. And at the same time what we are seeing in the European world, is also not something that we come across every decade.
While we have all been saying that markets have reversed significantly and valuations have become cheap, we also have to keep in mind that in 2011, even as markets corrected, quite a few stocks and sectors have run up and become expensive.

To that extent the dispersion in stock performance has been very high in the last one year in particular. If you remove some of the FMCG, IT and telecom stocks from the index, then you will see that markets are much lower than they appear. To that extent they do offer value.

Can markets correct more? Yes it can - if not for local fundamentals, it can, because of the Euro zone issues.
And remember, markets factoring negatives does not automatically mean that markets will not fall more. In other words, it does not mean that the price earnings ratio cannot shrink. In every bear market, valuations have gone much lower than the fair value.

I clearly believe the recovery from here will be very unlike 2008, when it was a V-shaped recovery. Money printing happened in the US and there was fiscal and monetary stimulus. But I think those days are behind us and even the incremental benefits of money printing are not coming through. So to this extent, I see a very slow recovery, more similar to the post-2000 period than the one seen in 2008.

Do you believe that issues such as huge repayment of foreign currency loans in 2012 could lead to financial instability?
One point that we should remember is that not all of the foreign currency borrowings would be required to be rolled over or refinanced. Quite a bit would be buyer credit and the same would be converted into rupee loans once they get the supplies. Yes, it is definitely a cause for worry that $80-90 billion worth of loans to be repaid. But to believe that all of these will have to refinanced by borrowing locally in rupee is taking an extreme view. Companies do have some reserves. Even if we do have to refinance, there are a different set of consequences. There will be a further liquidity tightening in the rupee and 10-year yields will go up once again and so on. But all this will not mean that we will become financially unstable.

If the RBI has not intervened in the foreign currency market so far and allowed the rupee to float, then they are aware of these consequences and may well be making sure that the resources are available at that point in time if it is required. So to that extent, I am not worried that such a scenario will lead to financial instability but I am worried that it will once again lead to interest rates going up, just as we are beginning to expect it to come down.

Crisis like the one in Europe now, may affect financial markets and not necessarily our economy. Our economy is not too export-oriented.

Gold has become a favourite asset class for investors. It has also outperformed equities even over a five-year period now. Can this out performance continue?
Gold is a potential investment and should form part of your portfolio but can simply not be compared with equity performance. This said, the exceptional circumstances in the world economies have led to gold being an out performer. That simply means that it is a one-off performance. Also, there is hardly any active fund management in gold because it has very little intrinsic fundamentals. Equity funds on the other hand have active fund management.

In equities I have the opportunity to invest in hand-picked companies run by good managers and invest in the growing Indian middle class story. Companies such as Nestle or Jubilant Foodworks grow based on this story.

Gold can never outperform such growth stories. Gold may have outperformed overall markets but not any specific sector or theme that was in vogue in a particular market.


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