The markets have been rallying in the past few days but Punita Kumar Sinha, Senior Managing Director of Blackstone Asia Advisors, still believes we are in a bear market and not out of the woods as yet. She does not think sentiment has lifted. “The sentiment is fairly bad also because unemployment is rising across the globe.
So generally people are very pessimistic about the future prospects of their own spending as well as the economic environment,” she said. However, she does see sentiment and the equity markets improving in the second half of this year. She also added that the economy might take a year to start showing the kinds of growth that it did in the last two years.
Sinha expects a three-year period where markets could be in a trading range.
Sinha is positive on India due to its domestic demand story, which she feels is very strong as compared to the rest of Asia. “People are also quite comfortable with India but given the uncertainty with elections, and the uncertainty with Pakistan and its neighbors, people are a bit more concerned about India.”
On earnings Sinha expects, earnings this fiscal to be worse than what we are going to see at the end of FY09. “So, FY09 is going to be better than FY10 possibly and there could be more deterioration in earnings downgrades. However, a large part of that may be factored into valuations but there could be some negative surprises too.”
Here is a verbatim transcript of the exclusive interview with Punita Kumar Sinha on CNBC-TV18. Also watch the accompanying video.
Q: Basics first – are we still very much in a global equity bear market or has that started changing with the rally of the last few days?
A: Even in a bear market you have a bear market rallies and we are possibly seeing a bear market rally. It is too early for me to say whether this is a secular shift; I doubt it is given that the global economic environment is so weak.
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Q: We’ve had a few of these since 2008 – these 10-15% kinds of moves – do you think this is one more of those because in bear markets sometimes you get rallies as powerful as 40-50%? Does it look like it has the shape of becoming something as meaningful is that?
A: May be not 40-50% but possibly it could extend given that the Fed yesterday came up with some very strong announcements on the liquidity front. Credit has been tightening too in the US. So generally credit tightening is always a leading indicator for equities. So it is very hard to say – the VIX index recently has been behaving itself quite well. I really cannot predict.
Q: What is sentiment like – you speak to so many people from that universe – is it as pessimistic as it was going at the end of 2008 or are you sensing that there is some return of risk appetite and sentiment has lifted somewhat?
A: I don’t think that sentiment has lifted. But I do think people feel like a bottom has been made and that we have some support levels below which the market may not go. But does it mean that it will test those lows again? It might. The sentiment is fairly bad also because unemployment is rising across the globe. So generally people are very pessimistic about the future prospects of their own spending as well as the economic environment.
Q: Do you subscribe to that view that a bottom has been made because after that October-November low, a lot of people said that we have a bottom in place for 3-4 months and then we just sliced through those bottoms with such effortless ease?
A: Interestingly I did think that the bottom was made in November and while India did break through that bottom, the MSCI Asia Index did not break through that bottom and has not tested the November 20 bottom yet. On a broader basis, that bottom holds in place for several markets.
Q: What's the mood specifically on emerging markets because money managers that we keep talking to don’t seem to be in a frame of mind where they start looking at emerging market equities again, start to take on some risk on the table and start buying stocks in some of these beaten down markets? Do you sense that EMs are coming back into the attention span or not quite yet?
A: Not really. People are clearly confident that China and India will do relatively better but the broader EM is a little bit harder because we have countries like Russia in trouble. We have several of the smaller EM countries that are also in trouble. So the broader EM allocations are not looking good. Countries specific, China for instance, the H-share or the local market is up this year by almost 15-20%. So China is clearly seen as the safest place right now by foreign investors. People are also quite comfortable with India but because of the elections, and the uncertainty with Pakistan and its neighbors, people are a bit more concerned about India.
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Q: What kind of Foreign Institutional Investor (FII) flows might we see in Asia and emerging market, specifically India because 2009 hasn’t exactly started well. We have already seen withdrawals of more than a couple of billion dollars, is 2009 going the 2008 way or is it a bad start which might get reversed?
A: It might possibly get reversed in the Q4, right now everyone is little unclear as to people have called the bottom several times and have jumped into equities only to loss money. So, people are a little bit more risk averse then they were even six months ago.
Right now the total amount of money that is dedicated to India is about a third of what it was in 2007. So two thirds of it has gone, some of it in redemptions, some of this market fall and we are at about 2005 levels in terms of asset invested in India. So clearly that has shown you how much we have lost and whatever we gained in the last few years has been lost. But that is also true for other emerging markets particularly Asia where we have also seen this same one third is what is left and is back to the 2005 levels.
Q: Does that mean that people who are stuck could still want to exit at every pullback in the market, or do you think the clock has been turned back such a lot that there is no percentage in selling and we have seen whatever redemptions had to happen already?
A: I think that those who haven’t sold yet are probably going to wait for a rally because they have been patient so far. So I don’t know - it is very hard to say that it all depends on what happens whether the global indicators show stabilization of the economies, if that happens and the global markets stabilize particularly the US, then there may actually be more money coming back into equities because people are sitting on unprecedented levels of cash as well.
Q: How much of this emerging market sentiment and performance is dependent on firstly what happens in the US equities over the next few months and quarters? And what happens to the dollar versus emerging market currencies, because we have had a fairly horrendous run till yesterday and day before on most of the emerging market currencies including the rupee?
A: Yes, we are in a deflationary environment right now, where as you can see even today from the India’s inflation numbers are fairly low, currencies are behaving very erratically and right now of course the dollar had been rallying and flight to quality and safety was going on to the treasury. But the movement that reverses would change the outcome of the currency market for emerging market. There is also a view though however that most currencies might devalue further. So, right now the currency market is looking very confused, I would not dare make a prediction there.
Q: But is that causing a lot of stress for large number of foreign investors into emerging market including India. The fact that they are not only losing on stocks, they are steadily seeing their Net Asset Values (NAVs) erode because of the currencies too?
A: I think that is true - for India the valuation are decent, they are not dirt cheap but there are lots of people who say maybe we will wait for the rupee at 54 to a dollar because that is when we would like to enter. We don’t think it could easily go to rupee 54 to a dollar. So that is what I have heard.
Q: I was looking at your Asian exposure and you have less than 10% in the Asia fund in India. Does that mean you are circumspect about how India might perform relative to Asia in the next one year or so?
A: Not in the next one year, I think I am generally positive on India due to the domestic demand story, which is very strong as compared to the rest of Asia. So on that count, I am positive on India but where I am concerned is about the elections, until the elections I don’t want to take an aggressively overweighed position in India.
Q: How are you approaching the elections do you think its as a lot of people believe a make or break event for the market, or are you waiting for it with some degree of opportunism that if there is a bad outcome, it might give you a big leg down which is the entry point to increase India weight age? What is your stance going into that event?
A: I think the stance is cautious but if you look at historical data you do find that either markets always rally with a pre-election rally or a post election rally, I don’t know which one it is going to be this time. It all depends on the new flow that we hear between now and the elections and post the elections. So, I am definitely going into this cautious way because I don’t see a very clear trend that has emerged at least so far.
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Q: As an investor would you change your view on the market, if you got the worst case outcome which for most investors is a third front government. It seems unlikely at this point most, if it were to come about would you change your view?
A: I think we need a stable government. Coalition governments are not able to deliver good governance. So, I think if we have a weak coalition government that will definitely increase the risk premium and we will probably need even lower valuations than what we are at today. But it depends on the nature of the government and what they can pull through.
Q: What worries you more about India and what worries investors generally in your part of the world more about India you think? Is it the macros like a ballooning fiscal deficit, a rupee which is steadily depreciating – those kinds of issues or is it micros like the market fully hasn’t priced in the earnings damage yet?
A: I think it is both – definitely the fiscal deficit is a big concern. The rupee obviously is a result of that and that’s a concern. There is another concern that people have of India which is not to do with India but its neighbors that India is sitting amongst many troubled neighbors and that particularly people are worried about the impact of Pakistan on India. So, that I hear a lot of foreign investors voicing. I do think at the micro level, earnings this year are going to worse than what we are going to see at the end of FY10. So FY09 is going to be better than FY10 possibly and there could be more deterioration in earnings downgrades. However a large part of that may be factored into valuations but there could be some negative surprises too.
Q: So you think fiscal 2010 over fiscal 2009 we actually see an earnings degrowth?
A: We might see companies showing degrowth. I don’t know about the broader market because that is a little hard for me to say – it might be just nominal amount of growth.
Q: What about overall macro growth? Do you do with the view that India might still strike out close to 6% growth next year because we had a scary report from one investment bank CLSA yesterday saying that growth will be no more than 4.5% for fiscal year 2010?
A: Right now, it is hard to predict because it is linked to the global environment and the global environment isn’t very easy to predict. However, we see some signs of mortgage applications picking up in the US. We see some leading indicators showing some positive trends. Based on the companies I visit, I have seen a lot of companies saying they are going to see 20-30% lower earnings than what they would have got in the normal cycle. So, based on that 5% is more likely in my view.
Q: You touched upon valuations earlier. Do you think valuations have adjusted enough to price in the worst kind of earnings picture that might emerge because as you said there could be degrowth next year but a lot of people are still going with modest growth for next year? If earnings turn out to be a whole lot worse, do you think the market even priced in that kind of a scenario?
A: I think earnings downgrades might still continue. We did some analysis and we found that the market valuations are fairly close to the previous economic downturn. But are they at the lowest level? No, because in 2002 we saw valuations for certain very short periods of time that were lower than what they are today. Could they go down to those valuations? They could but they’re fairly close to I would say to the lows they have achieved. So I don’t see a huge amount of downside there.
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Q: For the last five-months we have been just oscillating in this 8,000-10,000 kind of band. Do you think we will get away with this kind of a consolidation range and would it surprise you if the market broke down to something like 6,000-6,500 Sensex – is that conceivable in your eyes?
A: I think it is conceivable but if the S&P goes to 600 then the Sensex could go down to 6,000 and this is purely based on what the technical analysis shows. I wouldn’t be surprised right now by anything quite honestly.
Q: From a valuation perspective you could still justify that from what you are saying that 2002 low valuations would that correspond to the levels that we just spoke about – 6,000-6,500?
A: That depends on what do you factor in for earnings. The last low was about Sensex level of 7,700 or something. I think that’s possible if we come up with a very weak government and we don’t have a good outcome in the elections. It is possible. But even if it goes below that it may be for a very short period of time.
Q: When does it start getting better? That is the bigger question. A bottom is very difficult to game, but when do you think the turnaround starts happening? Is it in the second half of this year as a lot of people are saying or are you getting the feeling in the pit of your stomach that this is going to be a longer haul?
A: I think you have to break it into the stock market, the economy, and at the corporate level and then the sentiment. I think sentiment might start getting better in the second half. The economic data might start showing some signs of recovery in the second half. The equity markets might start looking better in the second half. Corporate earnings might not necessarily show a significant sign of improvement in the second half. They might take a year to start showing the kinds of growth that we have seen in the last two years.
Q: We are five quarters into one of the most vicious bear markets that we have seen out here. What are the chances or risk that this is not a six-eight quarter affair but turns out to be a three-year kind of a bear phase?
A: I started investing in India in 1993. So, from 1994 to 1997 we were in a market that was in a very tight trading range. It is only in 1999 that we saw like a very strong bull market. Then again we saw from 2000 to 2002 of markets that were fairly weak and in a trading range. I expect that we could have a three-year period where markets could be in a trading range.
Q: How would you define that range, around these levels of 8,000 to 10,000?
A: I don’t know. It is very hard to say, but plus or minus 25% range.
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Q: Just to talk about a few sectors that might lead any kind of earnings revision downward, what is most vulnerable right now? You’ve got weightages in both domestic and export sectors. Do sectors that are exposed to the west worry you more or not necessarily?
A: No. Of course sectors that are exposed to the west are more vulnerable, unless the US and European economies pick up. I think the strength in India is its domestic consumption story. The number of people that are living on income and such a low GDP per capita, where they are not as affected by the recession at all.
In this trip to India, I have actually gone and checked out some rural areas and there people are really not concerned about the global economic environment. They are not holding back their purchases. They are still buying because they are still upgrading their lifestyle. So, that area of the economy is doing well so far.
As a result, they are obviously vulnerable to some kind of downside surprise because everyone is talking about the same theme. I do think that one of the things I am surprised about is that unemployment is beginning to rise in India in the urban areas faster than I had expected. There are a lot more jobs getting lost here, a lot of contract workers being pulled out of the employment arena. So, there will be some impact on consumption that I don’t think is yet totally factored-in.
Q: Do you think that could be a bit of a tipping factor that a lot of these export sectors end up losing quite a bit of jobs and actually neutralises some of the cushion that we have from the rural side from a pure demand perspective?
A: It might. But I think the jobs are going across every sector. Every company I meet is looking to cut back its contract workers, is looking to cut costs. They are also looking to lay off the permanent workers.
But unlike the US where jobs are being lost at an unprecedented level where very highly literate people are losing jobs in addition to the entry level, here we are finding that in the middle management and senior management there is less of a cutback so far. I’m seeing more of a cutback at the entry level positions.
Q: How are you valuing companies at this stage of a bear market because earnings visibility is very murky? People have gone back and in many cases like financials or commodity companies, if you look at book value, asset value and try and see if they are getting stocks at big discounts to book value. Do you find a lot of comfort with sectors like financials and commodities in India looking at those kinds of valuation metrics or do you think those are also susceptible to dramatic changes?
A: I think the financials obviously could potentially see NPLs rising. So, the book value could itself be at risk. On commodities, it is very much a global call here. It is not necessarily that Indian commodity companies are going to do a whole lot differently.
I think definitely in this environment you want to be with companies that have a decent amount of cash. There are not a whole lot of them. But to the extent that you can get companies that are valued on cash flow would be a good measure.
Earnings visibility is very poor. It is not that analysts are not able to predict. It is just that the companies’ managements themselves aren’t clear. They are not able to tell you what will happen in three months themselves and they are actually in the operating environment selling their product. And they are not able to take a call on what kind of growth they are going to see.
Q: Before we end, just your thoughts on whether the Satyam hangover has passed from a global investor sentiment point of view because once the incident happened a lot of FIIs were quite shocked? Has that shock passed? Have people gone back to business as usual or does the aftereffects still linger?
A: I think largely I would say that people have gone back to business. But now they are going to be looking at every company with more scepticism. They are going to be testing whether the cash is really there that companies claim they have. The kinds of analysis you do now is going to be a little bit more detailed at least on these criteria.
Q: Are you still hopeful that we can eke out small returns from an equity perspective by the end of 2009? Do you think it will be one more negative here after 2008?
A: I hope it is not one more negative year. But we keep having these small rallies, which I think we also get in a bear market. You should be able to eke out some returns. They may not be sufficient but they should be there. Then who knows if we have a good government we could have a strong rally, and then if the US stabilises and all the measures that the Fed and the government is taking.
One thing I want to mention is that typically, which is historic and I am not sure history is going to play again is that markets lead economic recoveries. Typically markets bottom in the eleventh to thirteenth month of an economic recession. We are past that point now. So, one can make a case that the markets have already bottomed.
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