India An Overweight For Structural Reasons Alone: Crossbridge Capital
The strong run-up in Indian equities this year does not necessarily mean a selloff is coming, according to Manish Singh, chief investment officer at Crossbridge Capital. That’s as long as the fundamentals are strong, he said on BloombergQuint’s weekly series Thank God It’s Friday.
He is overweight on India in the emerging market basket “because of stable inflation, falling interest rates, structural reforms and changes coming in from the government”.
Here are edited excerpts from the conversation.
More Room On The Upside?
A lot of investors are of the opinion that there is very little value left in Indian equities, considering that the market has run up so much and valuations look frothy. What is your opinion?
I wouldn’t agree with that. I am not saying that you are going to have a massive upside, or the upside next year is going to be same this year. But markets don’t go up and down just because it has rallied 15 percent or 20 percent. You have to look at the fundamentals. So, a few things are happening.
The bank recapitalisation plan is extremely important and positive because it builds a credit channel back again in terms of lending money to businesses.India is entering a phase where you will have low-interest rates and low and stable inflation. These are the reason why Moody upgraded India’s credit status. These are fundamentally very important things because these are structural changes in the Indian economy. Some driven directly by government and some by the maturity of investors or businesses in the economy. If you use that as a fundamental underpinning, there is no reason to say that just because you have had such a good year, there would be a selloff in equities.
Another factor which is driving the market is the financialisation of assets. People are not keen on putting money in deposits as interest rates are going to fall and you are not going to get a huge amount of income from that, but they are feeling comfortable that they can get into the market and make higher returns. That itself boosts the market because your assets grow by virtue of returns and also by virtue of having new money.
‘Four Hikes Coming By 2018-End’
How much scope does the U.S. Federal Reserve have to hike rates?
A December hike is definitely on the cards, and you will get that in two weeks. We saw the Q3 numbers and the data was revised up to a growth rate of 3.3 percent which is better than the expectations. If you look at underpinning of the market, we are at a 4.3 percent U.S. employment rate. On the same trajectory, this employment rate is to fall below 4 percent in next 12 months which will be inflationary again. As a central banker, the Fed will be worried about data which indicate the market could be heating up. That is based on unemployment and GDP growth number. Bank lending has dropped compared to what it used to be. Does that tell you that there are some demographic changes? Or there is some change in the consumption pattern which means that things are not going to heat up as expected.
Given the current backdrop, we are going to get at least three hikes next year and one in December which is four hikes. It means that the short-term rates are going up by one percent and you will see more flattening of the yield curve. That will worry some people in terms of, does it mean that you have a recession in less than 12 months? I don’t think so. We see the GDP growth number at 3.3 and while unemployment growth will be low. What can bring the market down in the U.S. is the Fed if they go and raise the rates aggressively. But if you look at the bank lending number, that is not looking very attractive. Going forward, the Fed may not have to raise rates as much. But at the current state, I think the Fed will raise rates in December and raise at least three times next year.
‘Invested In U.S. Market For Next Six Months’
There are some analysts who suggest that valuations look very rich in those markets as well. Your take on the U.S. equity market?
I am fully invested in the U.S. market. In fact, I have been overweight U.S. for the whole of this year and it has done well for me, especially the overweight in technology. And I continue to maintain it. I believe that the underpinning of the market is very strong, and you had many stories about the market is hitting up.
There is a lot of sector rotation. Let’s say a certain sector has done very well. People are taking that money and moving out and move into a different sector. Below the surface there is a lot of movement happening in different sectors and it is likely that it will continue. If the short-term rates have to go up, then financials will do well. You will have people selling stocks which have made them money in technology or any other sector and reallocating to financials. But, if you are going at 3.5 percent and Fed is not raising rates aggressively, then you have a few months to go.
I look at the market on 3-6 months basis before I make up my mind whether I should be invested in it or not. On a 6-month basis, I am not concerned. I will stay invested and I do not see any major risk at least from what we have in front of us now. We can’t pre-judge what happens in North Korea or any other place. But from what we have now, I am comfortable to be invested in the market.
Let’s not forget, very few people are pricing in what the U.S. tax reform bill can bring, that is a genuine stimulus. The long-term impact in terms of the deficit, that is a different thing but in terms of the market, where the money is going to go, then that is definitely stimulus which will drive the market up again.
‘Overweight On India’
In the emerging market basket, where do you place India in your order of preference?
India is definitely an overweight among emerging markets because of stable inflation, falling interest rates, structural reforms and changes coming in from the government. It seems that we have the government on the right track, making all the right changes. There will be a lot of problems on the way because some of the changes which the government is making, particularly on GST, there will be an implementation issue. But one has to see that what does that establish, that it harmonises the market which leads to higher tax collection, higher revenue collection and less intervention from public servants to stop businesses or make life difficult for them. If you are making those structural changes then you have to be positive about it. We are talking about GDP growth still in the higher 6.5 or above, that is positive. It means that you have a bigger economy created every quarter with that growth.
In terms of international issues like oil prices, I am of the view that oil prices will not go beyond $65, unless you have major supply shock from events in Korea which we don’t see at this time.
Because of how that market has fundamentally changed, it could be a big support and stimulus, as it has been for India and emerging markets. For structural reasons alone, India should be an overweight which is corroborated by Moodys’ upgrading India’s rating which is a very positive thing. So, I can tell you, not just for myself but other foreign investors and research analysts, India is definitely an overweight position for many investors, if not all.
Watch the full interview here.